Updates - Macro Trend

Citi upgrades tech and U.S. stocks, names firms exposed to Russia that look ‘vulnerable’

PUBLISHED THU, MAR 3 20226:27 PM EST

Katrina Bishop@KATRINABISHOP

Citi has upgraded the tech sector and U.S. stocks more broadly, as it assesses which assets will benefit — and which look vulnerable — to the ongoing market volatility.

Russia launched an invasion of its neighbor Ukraine over a week ago, and fighting continues to rage in the north, east and south of the country. The unprecedented act of warfare in Europe sparked volatility across global markets, although Citi noted that the performance of stocks has been reasonably robust.

“We still want to buy the dips, and highlight that global equities have ended 10-20% higher after previous geopolitical crises,” Citi strategists, led by Robert Buckland, wrote in a research note on March. 3.

Federal Reserve Chairman Jerome Powell said on Wednesday that the Russia-Ukraine conflict had injected some uncertainty into the central bank’s policy outlook. Markets have priced in a rate increase at March’s meeting, but expectations for rate rises over the rest of the year have decreased since the Ukraine war began, according to CME group data.

Citi strategists also noted that rate expectations have fallen in light of recent events, even as the inflation outlook has been pushed higher – and the bank expects so-called “growth” stocks to benefit from this turn of events.

“Growth stocks were hit by rising real yields, but should benefit as they reverse. Therefore, we raise two classic growth trades (US equities, IT sector) back to Overweight,” Buckland said.

Growth stocks – such as U.S. tech giants – tend to have much of their earnings expectations in the future. When rates rise, it hurts those expectations; if rate expectations fall, these stocks could benefit.

As well as a “tilt back towards Growth,” Citi also cut Japanese equities and the industrials sector to neutral, and remains overweight on two “classic” value trades: U.K. equities and financials.

“Our changes hedge us against the recent drop change in real yields,” Buckland added.

Russia exposure

Citi noted that losses in equities to date have mostly been concentrated in financial stocks and those with direct exposure to Russia.

With this in mind, Buckland polled Citi analysts for a list of global stocks with meaningful exposure to Russia and Ukraine, warning: “These remain vulnerable.”

Consumer staples, industrials and materials are the sectors particularly affected, he added.

The list is down 17% so far this year as of Wednesday’s close, according to Citi, compared to an 8% fall in the MSCI AC World benchmark. Discounting energy stocks, Citi’s list of stocks has fallen 18% on average, the strategists said.

Here are some companies with the highest exposure to Russia, according to Citi, by geography:

U.S.

Asia

Europe

— CNBC’s Jeff Cox contributed to this report

March 8, 2022