Welcome to RBC’s Markets in Motion podcast recorded February 18th, 2022. I’m Lori Calvasina, Head of US Equity Strategy at RBC Capital Markets. This week in the podcast, we dig a little deeper into the Russia/Ukraine conflict from an US equity market perspective.
Three big things you need to know: First, US public companies haven’t been talking about geopolitics or Russia/Ukraine much recently, but the level of conversation is starting to pick up. Second, RBC’s US equity analysts see the potential for slowing growth/recession in Europe, higher energy prices, and potential impacts on supply chains as the most relevant challenges for their industries if a Russian invasion of Ukraine occurs. Third, we continue to believe that geopolitical problems emanating from Russia/Ukraine is a key risk for the US equity market in the coming weeks and months.
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Now, the details.
- Takeaway #1: US public companies haven’t been talking about geopolitics or Russia/Ukraine much recently, but the level of conversation is starting to pick up.
- As we’ve reviewed S&P 500 earnings call transcripts for 4Q reporting season, one thing that’s jumped out to us has been how little companies have been talking about geopolitics and the potential for Russia to invade Ukraine, a risk to markets and the global economy that Helima has been highlighting for the past few months.
- We have put together a fascinating chart showing the number of times geopolitics has been mentioned in S&P 500 earnings calls since 2014. The level of conversation has been quite low in recent quarters relative to pre-pandemic trends but has also been starting to move up. Corporate America and equity investors are starting to pay more attention, but we are still probably early days in terms of understanding its implications should it worsen.
- Among the S&P 500 and Russell 3000 companies that have discussed Russia and Ukraine since the start of the year, the commentary has mostly focused on monitoring the issue closely, the idea that it’s a risk adding to caution in the outlook, and highlighting the ability to manage through any operational disruptions, sanctions, impact to workforce, and FX implications. Some companies have noted that Russia and Ukraine are small end markets, while others have highlighted challenges due to commodity exposure for natural gas, corn, and aluminum.
- Takeaway #2: Our US equity analysts see the potential for slowing growth/recession in Europe, higher energy prices, and potential impacts on supply chains as the most relevant challenges for their industries if a Russian invasion of Ukraine occurs.
- Earlier this week we also conducted a survey of RBC’s US equity analysts to gauge their thoughts on how the industries they cover might be impacted.
- The first question we asked was how worried they would be about the outlook for their industries if Russia invades Ukraine. 29% told us that they were a little worried or very worried, while 50% told us that they were not worried at all or were not very worried.
- We averaged their industry scores by sector and found that, broadly speaking, the least worry resides in Energy and REITs, while the most worry resides in Consumer Staples.
- That being said, most sectors had at least one industry where our analyst was a little or very worried.
- Our second question asked the analysts to tell us which adverse impacts would be relevant to their industries. Those that were relevant to the greatest number of industries – were end market exposure to Europe, energy price exposure, and supply chain impacts. Non-Energy commodities like corn, and aluminum and the potential for corporate/customer/consumer sentiment erosion also gathered a fair number of votes, but were clearly viewed as being a bit less relevant. Very few thought direct end market exposure to Russia/Ukraine was a relevant concern.
- In our survey, we also gave our analysts a chance to elaborate on how this particular geopolitical conflict might impact their industries – to simply tell us what they thought about it. Many of those in the not very worried or not worried at all camps tended to cite the positive impact of higher commodity prices or noted limited exposure to European and/or Russian/Ukrainian end markets or the commodities caught in the crosshairs. Others noted that derivative impacts would not be particularly material to the outlook of their companies.
- Meanwhile, those describing themselves as a little worried or very worried tended to focus on negative impacts due to exposure to energy prices, European end market exposure, and the potential for exacerbated challenges on supply chains and inflation which they worried could pressure margins. One analyst, who covers Financials, also worried that the potential for even more exacerbated inflation pressures would contribute to even greater Fed hawkishness which could harm the US economy.
- Wrapping up with takeaway #3: we continue to believe that geopolitical problems emanating from Russia/Ukraine is a key risk for the US equity market in the coming weeks and months.
- We’ve been optimistic that the Fed is priced in, the economy will remain strong, and that investor sentiment has bottomed, and have stuck with our year-end 2022 S&P 500 price target of 5050. That remains our call today. But we do consider a worsening of tensions around Russia/Ukraine to be an important downside risk to our view that should be monitored closely.
- Given the likelihood that the US would respond with sanctions, we’ve increasingly come to believe that the US-China trade war that broke out in 2018 may provide the best point of comparison, though it’s admittedly also an imperfect one since Russia is a far less important trading partner to the US than China.
- On this point, it was interesting to see how the conversation about geopolitical risk progressed in 2018. In March of 2018 – when Gary Cohn resigned from his role in the White House over a disagreement with Trump’s decision to impose steel and aluminum tariffs on China – few S&P 500 companies were talking about geopolitics according to our transcript analysis. That would change over the summer 2018 as the level of conversation on geopolitics rose sharply.
- After festering for several months, China trade war concerns eventually contributed to another growth scare in the S&P 500 late in the year when the index fell nearly 20%. That potential for longer-term festering, the simmering tensions in the background, is something we worry could weight on equities for a period of time.
That’s all for now. Thanks for listening. And be sure to check out our sister podcast, RBC’s Industries in Motion, for thoughts on specific sectors from RBC’s team of industry analysts.