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Almost overnight, the world has changed. Russia’s invasion of Ukraine is likely to have far greater and longer-lasting consequences for the global economy than the pandemic inflicted.

Unless a deadly new variant suddenly develops, the pandemic is almost behind us. Like the Spanish flu a century ago, it faded away after a two-year run. Economies have already recovered to the point where central banks can start raising rates again, as the Bank of Canada did last week.

The world seemed to be regrouping, with inflation the new No. 1 concern. Then came Vladimir Putin’s ruthless, unprovoked attack on a Slavic neighbour and it all fell apart. Now Ukrainians are fighting for their very existence. Germany has done a U-turn on its energy and military policies. Switzerland has abandoned its centuries-old neutrality to join in the move to isolate Russia’s financial markets. Meantime, Europeans are desperately trying to buy potassium iodide pills to combat radiation poisoning in response to Mr. Putin’s decision to put his country’s massive nuclear arsenal on high alert.

The pandemic world was a nervous place. This new world is frightening. Let’s consider some of the things that have changed and their implications for our investments.

New arms race

The aftermath of Ukraine, however the situation there plays out, is likely to result in increased military spending by the West. Two weeks ago, the idea that Russia might attack NATO members in Eastern Europe seemed remote. No more. Latvia, Estonia, Lithuania, Poland, Hungary, Romania and other countries are suddenly on the front lines. Germany is concerned and has reversed long-time policies by sending lethal weapons to Ukrainian forces.

As a result, we’ve seen a sharp rise in the price of defence stocks, such as Raytheon Technologies Corp. (RTX-N), Lockheed Martin Corp. (LMT-N), and General Dynamics Corp. (GD-N).

The easiest way to invest in the U.S. defence sector is with the iShares US Aerospace and Defense ETF (ITA-A). It trades on the CBOE BZX exchange, formerly known as BATS.

This exchange-traded fund, which has more than US$3-billion in assets under management, was launched in 2006 and has a management expense ratio of 0.42 per cent. It holds 33 stocks, including the companies mentioned above plus other well-known names such as Boeing Co. (BA-N), Northrop Grumman Corp. (NOC-N), and L3Harris Technologies Inc. (LHX-N).

This has been a good long-term investment. The fund has a 10-year average annual compound rate of return of 13.5 per cent. Since inception, it has averaged 10.4 per cent. Year-to-date gain is 6.8 per cent.

Oil and gas

You don’t need to look any farther than your nearest service station to see the effect the war has had on fuel prices. Even the release of 60 billion barrels of strategic reserves didn’t stop oil’s meteoric rise.

But the geopolitical impact of Mr. Putin’s invasion goes far beyond the cost of a fill-up. Europe faces an energy crisis because of its dependence on Russia. According to the British Broadcasting Corp., about 40 per cent of the continent’s natural gas and about a quarter of its oil comes from Russia. The European Union probably has enough gas in storage to get it through the rest of the winter, but it will need to find other suppliers and pay higher prices if the flow from Russia is cut off.

Rising prices for fossil fuels are a bonanza for Canadian oil and gas companies, who were posting huge losses just a couple of years ago when oil prices briefly went into negative territory. Shares of Canadian Natural Resources Ltd. (CNQ-T) are up almost 33 per cent so far this year. Suncor Energy Inc. (SU-T) is ahead 18 per cent, and Tourmaline Oil Corp. (TOU-T) has gained about the same.

You can invest in Canada’s non-renewable energy sector by purchasing units of iShares S&P/TSX Capped Energy Sector ETF (XEG-T). It holds 22 stocks in its portfolio and is ahead about 30 per cent year-to-date and 93.6 per cent for the year to Feb. 28. That’s a big run-up but if oil and gas prices remain high, as is likely, these companies will be rolling in profits.

Green energy

Green energy companies have been in a prolonged slump as low oil and gas prices made them uncompetitive. But the financial equation has changed and that, along with the world’s continued focus on climate change, should make them more attractive to investors.

We’re just starting to see the effect of these changes in the markets. The Harvest Clean Energy ETF (HCLN-T), which has been a loser since its launch in January, 2021, gained 8.5 per cent last month. The BMO Clean Energy ETF (ZCLN-T) shows a similar pattern.

This sector appears to be on the cusp of recovery. Prices are still relatively low, so there is a lot of upside potential. Either of the two funds mentioned above are good choices. Both are global funds, with about one-third exposure to the U.S. Both have the same MER – 0.40 per cent. The BMO fund is slightly larger.

Commodities

Russia and Belarus produce a wide range of commodities, including wheat, platinum, potash and copper. Sanctions are going to hit billions of dollars of trade in those products, forcing customers to look elsewhere. Canada is well positioned to meet some of those needs.

Resource prices were already on the rise because of inflation. The invasion of Ukraine and the imposition of sanctions are accelerating the process.

Our top potash producer, Nutrien Ltd. (NTR-T), one of the recommendations of my Internet Wealth Builder newsletter, has seen its price rise about 25 per cent since the first of the year. Teck Resources Ltd. (TECK.B-T), which mines copper, zinc and steelmaking coal and has a stake in the oil sands, is ahead 37 per cent for the year. It’s also one of our picks.

A useful ETF in this sector is the iShares North American Natural Resources ETF (IGE-A). It’s ahead 21.8 per cent year-to-date and 44 per cent in the 12 months to Feb. 28. The fund invests in a variety of resource stocks including oil companies such as Chevron Corp. (CVX-N) and Exxon Mobil Corp. (XOM-N), mining companies such as Freeport-McMoRan Inc. (FCX-N), pipeline companies including Enbridge Inc. (ENB-T) and TC Energy Corp. (TRP-T), and gold miners Barrick Gold Corp. (ABX-T) and Newmont Corp. (NGT-T).

But be aware, this is a highly cyclical fund. It’s not one to buy and forget about. The 10-year average annual return is only 1.49 per cent, so if you decide to invest, keep a close watch on it and exit when conditions change.

Supply chains

Supply chain issues were a problem before Russian troops crossed the Ukraine border. Now, they’ve been greatly exacerbated.

“Our global supply chain will be forever changed as a result of this tragic crisis and the international community’s response,” Johns Hopkins University professor Tinglong Dai, who specializes in operations management and business analytics at the university’s Carey Business School, said in a news release.

“In the short term, energy, food, and semiconductor supply chains, as well as global logistics networks and financial infrastructure, will face various levels of disruption. Down the road, the crisis may herald the end of the post-Cold War era, calling into question fundamental assumptions that global supply chains have operated on for more than three decades.”

There is no clear answer as to how these issues will be dealt with or where investors can find profits. One of the main supply problems is semi-conductors, but all the semi-conductor ETFs I looked at are down year-to-date. Why? These companies have their own supply chain issues. They can’t get enough raw materials to allow them to meet demand.

Investors will have to keep a close watch on this situation. Read company financial reports carefully to see whether management refers to serious supply chain issues. Winnipeg-based NFI Group Inc. (NFI-T) said in its third-quarter report that supply chain problems combined with COVID caused “significant bottlenecks and disruptions to our operations.” Words like that in any financial report should be an amber light for investors.

One approach to this problem is to invest in companies that will see increased demand for their products or services. This includes transportation firms such as our recommendations TFI International Inc. (TFII-T) and J.B. Hunt Transport Services Inc. (JBHT-Q). Also, look at SonicShares Global Shipping ETF (BOAT-A), which is ahead 12 per cent year-to-date as demand for container ships and tankers rises.

I’m not suggesting a top-to-bottom overhaul of your portfolio. But you may want to lighten exposure to some sectors, such as technology, and add or increase it in others. The invasion of Ukraine has changed the global dynamic and we need to adapt.

Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca/subscribe

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