Investing In The Event of A General War In Eastern Europe

Hello Dinks,

I rarely go out on a limb like this because I’m no great prognosticator of future events.

I think the war in Ukraine is likely to spread in a matter of a few weeks.  Here is why I think this:

1. Nato is, by degrees, involving themselves in the Ukraine conflict.  The United States, United Kingdom, France and Germany are all openly supplying arms to Ukraine.  They are almost certainly clandestinely providing intelligence and logistical support where feasible.
2. War seductively infects people’s thinking. It allows people to experience feelings of purpose, of meaning and a reason for living – at least at first. This kind of thinking appears to have taken hold in the west.  Large sections of the U.S. Federal government and German Federal administration appear to be substantially influenced by a desire to punish Russia.  Thought leaders in finance such as Bill Ackman and the US public (here) at large all appear to want war.  Unfortunately, most of these policy makers have never experienced war first hand, are under the mistaken impression that it will be easy, costless and quick.  In short, they simply don’t understand what they are doing.
3. To avoid defeat, Ukraine will attempt to involve other countries. Ukraine alone can’t win. Russia has an economy that is nine times larger and a population that is three times the size of Ukraine. Also, Ukraine’s domestic economy has been severely disrupted and a large percentage of their population has fled. In the long run Ukraine will get ground down – but they’ll try their best to get other countries involved as much as possible before they’re defeated.

What all this adds up to is a situation where there is tremendous interest in fighting Russia, so it will be hard for policymakers to avoid the siren call to get further involved.

How To Invest To Capitalize On This?

If you agree that we’re heading into a broader conflict here some investing moves to consider:

Go Long On European Defense Stocks

European defense budgets are likely to increase substantially, especially in Eastern Europe.  In fact, the German and UK governments currently plan to double their defense spending. The major challenge here is most US brokerages can’t trade in European ETFs due to regulatory and reporting issues. So, if you want to go long on European defense stocks, you’ll have to buy individual companies.  And it’s an expensive hassle to do it.

Here is a list of companies to look at, along with their ticker symbols:

Hensoldt (NHSDF)

Rheinmetall (RNMBF)

Leonardo (FINMY)

Thales (THLLY)

Chemring (CMGMY)

Airbus (EADSY)

Dassault Aviation’s (DASTY)

The major trouble is that while most of these have an ADR (which is the American clone of the European shares), trading the ADR is expensive.  ADRs for these particular stocks have relatively high commissions, with low trading volume and large bid/ask differences – which means it’s harder to get good prices on the securities.

Buying US Companies With European Exposure

Some US companies have exposure to European markets:

BAE Systems (BAESY)

Lockheed Martin (LMT)

Boeing (BA)

Short Selling Russian ETFs

The imposition of sanctions will almost certainly harm the Russian economy.  A smart move would be to short sell the ETF funds that track it. However, sanctions in the US and Canada make that extremely difficult. This is unlikely to change until the conflict in Ukraine is concluded and diplomatic relationship renew. So, this idea is effectively out.

Shorting The Ukranian Hryvnia

The Ukranian hryvnia is likely to inflate.

Ukraine is a very difficult spot economically, roughly a third of their economy has been destroyed in the invasion and nearly a quarter of their population has fled abroad.  Usually during wars governments have options for raising revenue – including borrowing, levying taxes or creating more currency.  Ukraine’s economic situation will make it difficult for them to raise taxes.  War is also extremely risky, which means that Ukraine’s government may not be able to borrow at pre-war norms.  If these situations occur – are they are likely to – then the administration in Ukraine will likely turn to the printing press.

This means that shorting the hryvnia is probably a good move. To this this you’d need a currency trading account and you’d need to learn to short currency – which happens all the time.  A good resource for starting is here.

Pray

This last point isn’t really about making money, but Russia is a nuclear armed power and in the event of a broader war with Europe, the consequences could be significant.  So, in the unfortunate event that the conflict spreads, some prayer wouldn’t hurt.

For more on this, here are some useful resources:

Nasdaq.com’s comparison of the Russian and Ukranian Economies.

Here is a report from the reputable Dodge and Cox on the impact of the war for global markets.

The highly underrated Bill Conerly has a very good summary of economic impact of the war for Europe, Russia and the US.

His analysis in video here:

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