TOKYO — A new trend is emerging in global stock markets as investors began to turn away from globalization toward a “divided world” after Russia’s invasion of Ukraine. Shares of once high-flying tech giants have slumped, while those in more mundane sectors like energy and agriculture are doing well.
Right after the war started in late February, Joseph Quinlan and Lauren Sanfilippo, private banking strategists at Bank of America, began touting a new investment pool as an alternative to the dominance of FAANG – America’s tech giants. Facebook (now Meta), Apple, Amazon, Netflix and Google.
Called FAANG 2.0., the group covers five sectors related to fuels, aerospace and defense, agriculture, nuclear and renewable energy, and gold, metals and minerals. The strategists said FAANG 2.0 reflects “a new world” of geopolitical risks and resources.
Both strategists were on the right track as investors began to accept the bank’s view that the Ukraine crisis will lead to profound changes in the global economy. Among US stocks, shares of EQT, the country’s top gas producer, rose 2.2 times between February 23 – the day before the Russian invasion – and June 9, on hopes that it will boost exports to Europe, which has been rushing to reduce its dependence on Russian gas.
In Japan, Mitsubishi Heavy Industries’ share price has risen around 70% in the same period Japanese Prime Minister Fumio Kishida promised a “significant” increase in defense spending during his meeting with the President. American Joe Biden. Elsewhere, Nutrien, a Canadian fertilizer maker, saw its share price jump 20%.
The major exchange-traded funds in the five sectors covered by the FAANG 2.0 have outperformed the market by an average of 17 percentage points since the invasion of Russia, in stark contrast to the original FAANG’s underperformance of 12 points. Netflix’s share price, hit by its first-ever drop in subscribers, fell 50%.
Companies in these five sectors should also see their earnings improve. According to QUICK-FactSet, analysts expect earnings per share in the four integrated sectors of oil, aerospace and defense, agricultural commodities and milling, and precious metals to grow through 2024. Although nuclear power is not included in the forecast, the sector’s earnings per share are expected to remain strong.
The group’s long-term prospects are also improving. In April, the World Bank raised its energy price index for 2024, revising its October 2021 forecast from 84.4 to 110.8. The index covers the prices of oil, gas and other energy. Its food price projection has also been raised by 15% from forecasts published before the Russian invasion of Ukraine. Defense intelligence provider Janes raised its projection for global defense spending for 2025 to $2.22 trillion from $2.15 trillion.
After the end of the Cold War in 1989, goods and services began to move across national borders, as did investment money. “Big IT companies have benefited the most from globalization,” said Shinichi Ichikawa, principal researcher at Pictet Asset Management (Japan).
But many investors have begun to see the Russian invasion of Ukraine as the start of a new Cold War. “Over the next 10 years, the global economy will face the same kind of inefficiency as it did during the Cold War,” said Masayuki Kichikawa, chief macroeconomic strategist at Sumitomo Mitsui DS Asset Management.
In a divided world, the prices of fossil fuels and certain agricultural products tend to rise due to their limited production bases. Companies will also need to consider national and other security as a variable in determining management policy.
FANNG 2.0 companies thrive on these additional costs of navigating the new reality. Therefore, the recent outperformance of their shares does not bode well for the global economy, analysts say.