Ross Mayfield, Investment Strategy Analyst at Baird, discusses how companies with international exposure are impacting U.S. investors and highlights which industries are navigating geopolitical conflict. 

Opening Bell

Global Companies Feeling the Affects of Russia-Ukraine Conflict

I have some more early morning inside on trading activity. I'm joined by ross Mayfield investment strategy analysts at baird ross, glad to have you on this morning companies with european exposures, names like aero airlines, software engineering firm E pam, I'm not even talking about the oil companies that have kind of ties there. All of them have recently taken a pretty significant hit in the recent weeks. What is your take on global companies either self sanctioning or being barred from doing business with Russia and how could this kind of impact us investors in the near term? Yeah, I think it's got to be top of mind right now for for most investors, you know, the uncertainty around the situation in Ukraine and what the spillover effects will be in Western europe. Um, so it makes sense for me that some of these companies will be selling off, particularly the ones that are divesting themselves from projects that may have even been profitable but are no longer tenable in the current environment. Um, We have, you know, we're watching Western europe closely, we, we had been optimistic about the outlook for the country and the economy in a, in a post covid world. Um, but as of right now, the uncertainty and the and the kind of shadow looming over the risk assets in that region is pretty large. And so the selloff here makes a lot of sense to us. And honestly with, with not a clear resolution in sight, we think this kind of volatility, you know, in europe, but, but even in U. S. Assets, given the kind of global nature of our markets could continue in the near term, let's talk a bit of the kind of the energy sector Chevron which actually ring the bell here just a few moments ago. Um it is buying biofuel maker renewable energy group for about $3.1 billion as a kind of lean towards a low carbon economy. What do you make of this kind of shifts into renewable amid the picture that we see with the oil and then with that, what's your outlook on the oil and gas industry? I think this is a great reminder that while a clean energy future and and it goes for for you know, climate change reduction, all of that is a great um long term goal and I think we you know, making steps towards that now makes a lot of sense. Um but in the near term the world still runs on oil still runs on you know kind of old school energy and when there are kinks in the supply chains when there are kinks and production, when there are kinks and transportation. Um it has it has real world ripple effects are near term outlook for energy. You know, I think a lot of the turmoil is is kind of priced in at this point, but I think the risk clearly remains to the upside for for crude prices for natural gas prices. That's another reason, reason the outlook for europe is a little bit worse off than the US given the high reliance there on Russian supply for for those types of energy. Um, so yes, so longer term, I I think a shift of climate, climate friendly and renewable energy sources makes a lot of sense. It's a long term goal though. And in the near term and then the intermediate term, a lot of different things can occur that would kind of shift things around and make you reevaluate, you know, amid this picture, we're so focused on particular sectors that are moving, or certainly the situation between Russia and Ukraine, not to mention just, you know, the Fed picture that we've been following for months now. It's easy to forget that this upcoming friday, the february jobs report, um, that's going to be out with that report coming out. Do you anticipate data anyway? Could sway the Fed to, to move more aggressively on interest rates between March and june not that it needs any more reasons to potentially be more aggressive here. Yeah, I think you said it, I, you know, I don't think there's uh, you know, I guess it could come in incredibly strong, but I don't think there's a number that could prompt the Fed to be more aggressive than was priced in at least ahead of the escalation in the Ukraine. Um, at that point we were looking at a very high probability of a 50 basis point rate hike in March as well as, you know, 7-plus rate hikes for the for 20, Those odds have come in quite substantially with the turmoil in the Ukraine, but it's still positioned for a fairly aggressive Fed in 2022. Um if anything, you know, I would think that the downside surprise could just add a little bit of ammo to the Fed, wanting to take it slower, um be a little more dovish than they had indicated maybe after the january CPI I report, that was so hot. Um Look, we expect a good number, the economy at least the domestic economy is really firing on all cylinders right now and that's contributing to the inflation that we see. But uh certainly the Fed is ready to hike. You know, the the turmoil is causing a bit of a pause, but we don't think it will meaningfully knocked them off their path. I'm looking at your note here, just kind of your market notes here and you you kind of talk about two readings um that pretend kind of above average to medium term returns. Talking about depressed sentiment and high level of policy uncertainty. Can you just break that down for us your insight there? Sure. I I mean, it's kind of from a high, high level um investing at contrarian moments, tends to be the way to to really make outsized gains over the course of history. Um So one reading we look at is the domestic policy uncertainty and global policy uncertainty. It's basically just a reading of, um, you know, what is the outlook uncertain? It's wide estimates among economists, um, you know, it's, and so from those points of elevated uncertainty, ford returns tend to be really strong, depressed sentiment is probably more widely followed when things like put calls spike, when the survey data that's widely followed turns bearish. Ford returns from there tend to be quite strong as well. Um, at the top, you mentioned the vix kind of spiking above 30. Um, forward returns from elevated vix readings tend to be a bit stronger or above average as well. So, um, it's not the only thing we consider, obviously the situation in Ukraine and the, the economy on the ground, all of that matters. But when things do get quite bearish and quite uncertain, it historically has been a great opportunity for investors to dip their toes back in the water. I will note really quickly, just as you're talking there, the NASDAQ and S. P 500 they're turning positive just fractionally less than 1/10 of a percent at the moment. But with that, looking at the NASDAQ specifically here, the NASDAQ is up 4% over the last four weeks, 12.7% I think here to date with the sectors or names within the tech industry, what are the ones that you think could have the most growth potential as it seems like investors are looking for, like safer spaces right now for their money. Absolutely. And, and I continue to think tech looks attractive, particularly after the recent selloff. I do think it's worth, um, kind of splitting tech into, into 22 separate buckets. Right? So there's the large cap, super high quality, um, you know, maybe garb growth at a reasonable price type tech. Um, you know, high cash hoards low debt levels really wide modes. That's where I would be looking at this point in the cycle. You know, we're middle of the cycle, um, particularly amidst geopolitical uncertainty. A shift of quality makes sense. There's plenty of quality to be found in the tech space and in fact probably more to be found there than a lot of other sectors. On the flip side. You have the super rate sensitive names, the really high growth, um, long term forward growth names, um, that have basically been in a bear market and mostly much worse over the last year. I would still be skeptical of those types of names. The trend is not good. They might pop on days where sentiment shifts or where, um, you know, particularly the last week where the Fed looks like they're pricing in fewer rate hikes. They are very, very rate sensitive. Um, they have, they have a lot of their value tied up in their long term cash flows, not necessarily near term cash flows. So I would be focused more on that first bucket in this current environment. That's where we think the near term out performance could be. I know we're towards the end of kind of earning season, but we've got names like Kroger, Best Buy and Costco, they're still set to report earnings this week with things like that. What are you watching? Yeah, Well, those names in particular, consumer names are what we always have an eye on very, very closely, particularly um, with inflation kind of returning to our shores with higher oil prices, potentially portentous, higher gasoline prices in the US, higher food prices potentially. We want to see, does the consumer have the cushion that we think they do? And even if they do, will they go forward spending that in 2022? Um, we are a consumer based economy. That's not a secret. We need to see that the consumer sentiment readings at depressed levels. Um, really at their lowest in the last decade lower than the covid crisis or other situations we've seen. We need to see that the consumer will actually spend through that to date retail sales. Other metrics of consumer spending have been really strong inflation pressures that depressed sentiment pressures that, um, so with these consumer names in particular, we want to see if the consumer is showing up and spending dollars online in store post covid pre covid. Um, we need the consumer to stay strong to really have a, have a healthy economy going forward as we're a couple years off the the bear market lows. We know our economy is so dependent on that factor there. Before I have to let you go here. Just want to get your thoughts on the cyber security sector and space. Right. Given the conflict between Russia and Ukraine, even over the last two years we have seen kind of increased cyberattacks, the industry is up 6% in the last four weeks. So so with that, what's your kind of near term a take on the sector? I think it makes a lot of sense for investors looking for kind of that longer term growth bucket that we were talking about. Um, geopolitical events like this one and we've seen them over the past 5 to 10 years, always called to attention the need for a really strong cybersecurity. You know, if you read any medium term outlook piece from any of the major, you know, Southside players, um they highlight cybersecurity risk is not just major corporate risk, but governmental risk. I think that the spending, their infrastructure spending will go, they're both in the private and the public sector. So if you're looking for a place to, to kind of be exposed to some of that longer term growth, I think you could do a lot worse than that industry. Um, interest will always spike around events like this, big hacking events or geopolitical events, but longer term, I do think you'll continue continue to see um, Capex go, their corporate spending go there and, and honestly, public spending go there as we focus more on infrastructure. You know, the traditional thinking is that's physical infrastructure, roads, bridges, broadband. Um, increasingly that will mean cyber infrastructure as well. Ross, always good to have you on. You always have such great insight on a broad range of issues, from earnings to cyber detective to the Fed and the likes. Ross Mayfield, investment strategy analyst at Bayer.