Shares of tech giants have slumped, while those in more mundane sectors like energy and agriculture are performing well.
After the war began in late February, Joseph Quinlan and Lauren Sanfilippo, private banking strategists at Bank of America, began touting a new investment grouping as an alternative to the dominance of FAANG U.S. tech giants Facebook now Meta Apple, Amazon, Netflix and Google.
The group, known as FAANG 2.0, covers five sectors related to fuels, aerospace and defense, agriculture, nuclear and renewables, gold, metals and minerals. The strategists said that FAANG 2.0 reflects a new world of geopolitical risks and resources.
The two strategists were on the mark when investors began to accept the bank's view that the Ukrainian crisis will bring significant changes to the world economy. Between February 23 and June 9, shares of EQT, the country's top gas producer, went up 2.2 times between the U.S. stock market and Europe due to expectations that it will boost exports to Europe, which has been eager to reduce its dependence on Russian gas.
The Japanese stock price of Mitsubishi Heavy Industries went up about 70% during the same period as Japanese Prime Minister Fumio Kishida pledged a significant increase in defense spending during his meeting with U.S. President Joe Biden. Nutrien, a Canadian fertilizer maker, saw its stock price jump 20%.
Major exchange-traded funds in the five sectors covered by FAANG 2.0 have overperformed the market by 17 percentage points on average since Russia's invasion, showing a sharp contrast to the original FAANG's underperformance of 12 points. There are companies in these five sectors that are expected to see improved earnings. According to QUICK-FactSet, analysts predict that earnings per share in the four sectors of crude oil, aerospace and defense, agricultural commodities and milling and precious metals will increase through 2024. Per-share earnings in the sector are expected to remain strong, even though nuclear power is not included in the forecast.
The group's long-term outlook is improving as well. In April, the World Bank hiked its energy price index for 2024, revising its October 2021 forecast of 84.4 to 110.8. The index covers oil, gas, and other energy prices. Its projection for food prices was raised 15% from the forecast for food prices before the Russian invasion of Ukraine. Defense intelligence provider Janes raised its projection of defense spending for 2025 to $2.22 trillion from $2.15 trillion.
Investment money and goods moved beyond national borders after the end of the Cold War in 1989. Shinichi Ichikawa, a senior fellow at Pictet Asset Management Japan said the Russian invasion of Ukraine was the beginning of a new Cold War. Masayuki Kichikawa, Chief Masayuki Kichikawa, chief macro strategist at Sumitomo Mitsui DS Asset Management said that the world economy will face the same kind of inefficiency as during the Cold War over the next 10 years.
The prices of fossil fuels and certain farm products tend to go up in a divided world due to their limited production bases. In order to determine management policy, businesses will have to consider national and other security factors.
The recent outperformance of their stocks does not bode well for the world economy, analysts say.