It is nearly impossible to predict any crisis, least of all an all-out war. Many economists globally expected the situation between Russia and Ukraine to de-escalate soon. But things took an unexpected turn.
During unpredictable situations, particularly an economic crisis such as this, it will be difficult to make investment decisions.
While you can’t predict an economic or political or personal crisis, you, as an investor, can prepare for the situation financially. Mind you, such a situation may never come, but if it does, it is better to be prepared.
Since we live in an interconnected world, every time there’s a geopolitical crisis like this or an economic crisis, stock markets naturally get impacted. With global economies more interconnected in this decade, any crisis poses a threat to global supply chains, which leads to economic uncertainty.
Let’s understand with an example.
When the outbreak of Covid happened in 2020, the equity markets the world over tanked. Dow Jones Industrial Average tanked 50% in March from its January (2020) levels. Similarly in India, Sensex tanked around 57% on March 23, 2020, from its Jan’ 2020 levels.
In the case of the Russia-Ukraine situation, while the global indices are down, some recovery is witnessed within the same day. Take Nifty for instance. It tanked nearly 5% on February 24, 2022. But recovered 2% on February 25, 2022, during early trade.
Having said that, markets are volatile not just in India but globally, considering the uncertainties and the impact on the economies.
Also, read Economic Impact of the Russia-Ukraine Crisis
Immediate effect in such a situation is not only seen in stock market movement alone but in oil, gold prices and certain sectors as well.
The border situation between the two countries has led to oil on the boil. Brent crude reached $100 per barrel on February 24, 2022. It crossed that mark for the first time in 8 years. JP Morgan expects the oil prices to go up anywhere between $120 to $150 per barrel if oil flow from Russia is disrupted.
While India’s impact on the current crisis may not be direct, the effects of the crisis could still impact the country’s economic growth. As per various media reports, Russia is the 25th trade partner for India (in terms of exports value in 2022). With sanctions imposed by multiple countries, India’s exports could get affected. These mainly include tea, mobile phones, and pharmaceuticals. Similarly, India imports crude oil, coal and diamonds from Russia. It could disrupt the supply for the country temporarily.
As part of the sanctions imposed by the US and EU, most Russian banks have been blocked from the SWIFT payment system. SWIFT is a payment network that ensures quick cross-border payments globally. With the blocking of the Russian banks from the payments network, it will be difficult for Indian traders to make/receive payments from their Russian counterparts.
On the positive side from India’s perspective, once the dust settles, the demand for Indian exports could be higher if supplies from Russia are disrupted. For the EU, Russia is one of the key trade partners and in its absence, India could be an alternative.
Once past the initial shock, the next wave determines whether the impact is short-term or long-term.
First, if this war-like situation continues, it could disrupt the already strained supply chain. The whole supply-chain ecosystem is recovering post the lockdown restrictions globally. Russia is the world’s largest exporter of wheat, soybean, and other commodities such as aluminium and nickel.
Two, with many world leaders imposing sanctions on Russia, it could drive up inflation on these commodities and indirectly impact the related sectors. Fuel prices too are likely to go up as the supply of crude oil is yet to pick up the pace.
And lastly, there are chances that inflation is likely to rise across economies faster than expected. Thereby affecting economic growth.
Thus, while experts may not have an idea on how things will pan out for Russia, Ukraine and the rest of the world, the immediate effects appear clear: the rise in prices of food and fuel and disruption in the supply chain. And volatility in your investments.
Irrespective of an economic crisis, you may need a large amount if there is an emergency. Here’s how to prepare financially.
As the name implies, you could build a fund just for emergencies. Many financial advisors recommend having 3 to 6 months of your salary as an emergency or contingency corpus. You could have these parked either in bank FDs, savings accounts or even in liquid mutual funds. But having this fund is important to get you and your family through a crisis, be it economical or personal or medical.
There are a few points to keep in mind.
One, equity investments are generally made for the long-term. If you have invested in fundamentally good stocks, it is better to hold your investments. Even if the market continues to be volatile or if your investments are in the red, fundamentally good stocks usually recover. Likewise, if the entire sector is affected, financially sound stocks recover in the long-run.
Two, during a crisis, the markets correct. It may provide buying opportunities for you as an investor. Keep an eye for such opportunities. But do keep in mind that you could be in a crisis, so ensure that you have sufficient funds to handle any financial emergencies before you make fresh investments.
If you are a seasoned trader, you could use the current volatility to your advantage by using multiple strategies such as stop-loss (for hedging). Also, you could set a specific target price or profit percentage for stocks you are trading (so you could make a timely exit). And check technical charts for consolidation or breakouts.
However, if you are new to trading, it is better to wait and watch.
Volatility in the equities market affects mutual funds investments as well.
In such situations, the ongoing SIPs can continue as you would benefit from rupee-cost averaging.
If you had made a lump sum investment, it could be better to hold them until the market recovers. No point in selling them, if you are incurring losses. One could also consider fresh lump sum investments if it is within your financial means.
Diversification helps in balancing your portfolio. Normally, during any crisis, gold as an investment outperforms. Having exposure to various asset classes could bring down your losses due to volatility.
While markets tend to be volatile in the short-run, in the long-run, if invested in fundamentally and financially sound companies, things could work out well for investors. After all, long-term investments lead to wealth creation.