Interactive Investor

Heavy selling across Europe highlights these safe haven stocks

1st March 2022 14:01

Graeme Evans from interactive investor

Our City expert assesses the impact of the Ukraine conflict on financial markets and identifies the resilient stocks best able to cope.

Defence, mining and cybersecurity-focused stocks continue to provide safe havens for investors after European markets saw more heavy selling pressure today.

The FTSE 100 index fell 1% and Brent crude returned above $100 a barrel as multiple asset classes are impacted by the Ukraine invasion and the West's sanctions against Russia.

Deutsche Bank noted today that 28 of the 38 non-currency assets in its coverage were lower in February, including a 3% fall for the S&P 500 in the US and the Stoxx 600 index in Europe. The continent's banks were among the worst performers, declining 9.3% last month amid fears over the exposure of lenders to the Russian economy.

Numerous commodities surged in February, with oil and gas the most notable examples. The potential for disruption to Russian exports sent Brent crude up 10.7% in the month to stand above $100 a barrel for the first time since 2014, while European natural gas lifted 16.4%.

There were also double-digit increases for wheat at 21.9% higher and aluminium at 11.5% up, as both are heavily dependent on supplies from Russia and Ukraine.

Deutsche Bank analyst Jim Reid says: “These rises in commodity prices are set to make life increasingly difficult for central banks. On the one hand, they are unable to take direct action to deal with the supply shock, but on the other its consequences will be seen through higher inflation and lower growth, with the risk that higher inflation becomes entrenched over time.”

The oil price surge has enabled shares in BP (LSE:BP.) and Shell (LSE:SHEL) to hold firm, despite this week's disclosures of big write-downs from the disposal of interests in Russia.

Commodities boost

Other smaller exploration and production firms should also receive a cash flow boost, particularly those where production is not set at a fixed price. On Friday, Peel Hunt picked out potential beneficiaries including FTSE 250-listed Harbour Energy (LSE:HBR) and smaller Gulf Keystone Petroleum (LSE:GKP).

Among mining-focused stocks, Anglo American (LSE:AAL) and Rio Tinto (LSE:RIO) rose in the FTSE 100 index today amid a continued spike in the price of various industrial metals due to Russian exports of aluminium, nickel, copper and palladium being constrained.

Peel Hunt picks out potential small-cap beneficiaries in copper as being Atalaya Mining (LSE:ATYM) and Central Asia Metals (LSE:CAML), adding that Tharisa (LSE:THS) is well positioned to capture strong prices in platinum group metals due to its low-cost open pit mine in South Africa.

With gold returning towards a 13-month high, shares in Egypt-focused Centamin (LSE:CEY) today led the FTSE 250 index after a 4% rise, while Hochschild Mining (LSE:HOC) and Pan African Resources (LSE:PAF) have also risen in recent days.

Solid defence

London's top flight was again led by BAE Systems (LSE:BA.), which is up by 25% over the past week amid the expected surge in US and European defence spending. The blue-chip stock jumped as much as 14% to a record high on Monday, after Germany's historic pledge to spend €100 billion modernising its armed forces.

JP Morgan Cazenove says the Ukraine invasion had “fundamentally changed” the outlook for European defence stocks, with MoD research fim QinetiQ Group (LSE:QQ.), countermeasures business Chemring Group (LSE:CHG) and military helmets business Avon Protection (LSE:AVON) among others trading sharply higher on Monday.

A renewed focus on cybersecurity has meanwhile led some investors to the tech sector, resulting in a rejuvenated performance for former blue-chip stock Darktrace (LSE:DARK) after its shares jumped more than 25% in the past week.

Vulnerable to sanctions

On Friday, Peel Hunt picked out a number of stocks in its coverage where the Ukraine conflict and Russian sanctions might have an impact. They include animal genetics company Genus (LSE:GNS), given that it has a market-leading porcine business in Russia with a largely local supply chain, as well as bovine businesses in both Russia and Ukraine.

While the building sector has no direct exposure, Peel Hunt said there could be some secondary consequences for London-listed companies.

It said: “This includes the impact on London property transactions (both residential and commercial) from Russian investors on companies such as Berkeley Group (LSE:BKG), Savills (LSE:SVS) and Foxtons Group (LSE:FOXT).

Others include the likes of Grafton (LSE:GFTU) and SigmaRoc (LSE:SRC), which have sizeable Finnish operations that could be impacted by a Russian economy weakened by economic sanctions.”

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