Dale Jackson

Personal Finance Columnist, Payback Time

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It can be heart-wrenching to witness the tragic human toll of Russia’s invasion of Ukraine. Empathy compels us to react, and that has spurred an outpouring of sanctions against Russia from governments and businesses in the global community.

Energy supply disruptions and the prospect of a wider conflict in Europe has global financial markets on edge, but for long-term investors with diversified portfolios focused on business fundamentals; this too shall pass.

Markets have always weathered geopolitical conflict over the past century because a profit motive eventually prevails. Many of the multinational corporations cutting ties with Russia - such as McDonald’s, Coca-Cola and Starbucks – can be staples in retirement portfolios. As cynical as it may sound, their actions against the Putin regime are merely token gestures and are unlikely to materially impact their bottom lines.

As an example, McDonald’s generates less than two per cent of its global revenue from Russia and Ukraine. A client note from Baird Equity Research acknowledged the short-term headwind from the closures but maintained its buy rating on the company’s stock.

“We continue to believe [McDonald’s] remains one of the best-positioned companies in our coverage to navigate the current backdrop, and as a result, we recommend purchase of the shares at current levels,” it said.  

Other analysts shrugged off the closures even after factoring the fast-food restaurant’s decision to continue paying employees in a severely-devalued Russian currency.

In the end, companies like McDonald’s are judged on their ability to grow revenue, keep costs low, and widen profit margins. If its stock takes a short-term hit, it’s that much more of a bargain.

It’s a similar story for investors who get global exposure from U.S.-listed multinationals, which account for roughly half of global equities.
 

NAVIGATING GEOPOLITCAL RISK

Geopolitical risk is a tough metric to gauge, even for the experts.

As in most cases, the best hedge is diversification. Investors can get exposure to large baskets of those familiar multinationals through exchange-traded funds (ETFs).

The most basic source is an ETF that tracks the S&P 500. How much of a specific company the fund holds depends on its day-to-day price fluctuations. If a larger company’s stock price flounders as a result of geopolitical turmoil, exposure will automatically be reduced.

For investors wanting more foreign exposure, there are ETFs available that focus on U.S.-listed multinational companies that emphasize revenue growth outside of the United States.

Investors wanting to pick and choose to avoid geographic trouble spots can select from a wide array of country-specific ETFs.

There are few Russia-specific ETFs on the market but Russia is difficult to avoid in European emerging market ETFs. Russian stocks made up over half of the benchmark MSCI Emerging Markets Europe Index as of March 1. Russian-based oil giant, Gazprom and financial services firm Sberbank are among the top holdings (both have been on the Canadian sanctions list since 2015 after the Russian invasion of Crimea).

A more expensive way to navigate geopolitical risk is through an actively managed international or global equity mutual fund. International equity funds invest in stock markets outside North America, while global equity funds invest anywhere in the world.

Annual fees can be as high as three per cent of the total amount invested compared to a fraction of a per cent for ETFs. Average returns from global and international mutual funds lag their benchmarks but some funds that have experienced managers at the helm have performed amazingly well.

One advantage active management has over passive ETFs is the ability to assess and anticipate geopolitical conflict - and steer clear before it erupts.