By Soumyo Sarkar

The Ukraine crisis occurred just when US investors were bracing for two potentially market-moving events. Firstly, the US Fed was about to embark on a series of rate hikes. The so-called dot plot indicated seven quarter-point rate raises for 2022 in March accompanied by a rapid wind-down of its bloated balance sheet. A vocal minority expected the Fed to hike 50 basis points in March to tamp down raging inflation. Secondly, there was a clear sense that the Pandemic was finally behind us, and covid-19 was entering an endemic state, like seasonal flu.

Prices of several commodities such as oil, gas, industrial metals, and grains were already rising even before the Ukraine invasion. Since the crisis has unfolded, the prices of these commodities have gone to the roof, making inflation worse. However, the market also signals that this event may cool the economy faster in the medium term, reigning in more aggressive Fed rate raise expectations. The yield on the 10-year US Treasury, often a proxy for long-term inflation expectations, has fallen from over 2% just before this event to 1.73%.

We feel that this is an opportunity for Indian domestic investors to increase their allocation to the US stocks for the following reasons:

  •  Most domestic investors are underinvested in the US markets. But recent technology innovations have made investing in the US markets easy and inexpensive, without any regulatory hurdles
  • Compared to Europe (and to a lesser extent, Asia), the US has very little trade with Russia and therefore is among the least affected by supply disruptions resulting from sanctions
  • The US is also a large producer (and often an exporter) of oil, gas, some industrial metals, and agricultural products. Therefore, while the US consumer will still be hurt by rising commodity inflation, many companies are ought to benefit from it.

Instead of investing in individual stocks, we suggest investing in themes. There are currently many liquid ETFs composed of baskets of stocks that represent a theme. The advantage of this approach is that one can invest in a sector or a theme without taking specific risks tied to an individual stock.

Some of the themes we like in the current environment are:

Commodity producers (particularly Oil and Gas as well as Industrial metals) and Agriculture

This theme was already working well this year- the Ukraine crisis further bolsters the case for its continuing outperformance.

Alternative energy companies

The urgent need to develop and fund alternative sources of energy will rise.

Cybersecurity companies

Cyberattacks are a big part of modern warfare among global powers. As Ukraine grinds on, companies that provide Cybersecurity will be in demand.

Defense and Aerospace

We posit that the invasion of Ukraine will lead to a big-spending ramp up in this sector, and significant global arms suppliers will be the beneficiary.

FAANG Stocks

They are the best positioned to recover from the Tech selloff when market conditions improve.

(Soumyo Sarkar is an Ex-Wall Street Fund Manager and Financial Advisory Council Member of Fintso. Views expressed are the author’s own. Please consult your financial advisor before investing.)