What happened: Much to everyone’s disbelief, the war that Western leaders had been preventing for months has finally come to pass. Russia has launched a full-scale invasion of Ukraine, including the country’s capital, Kiev. Ukraine’s government has approved a state of emergency that allows curfews, suspends political rallies and mobilizes the country’s military. Ukraine has also closed its airspace to civilian flights. Updates continued to pour in with claims that Russia struck Ukrainian airbases. We do not have the ability to predict how the situation will develop, but we believe that this crisis has drawn and could draw more nations to the battlefield.
What led to the war between Russia and Ukraine?
It’s not a short or easy story, so to simplify the complicated things, let’s go back to 1991, when Russia and Ukraine were still part of the Soviet Union. Now, when the Soviet Union split, most countries under SU became independent, including Ukraine and Russia. Ukraine was and remains strategically, economically and politically very important from the point of view of the EU and Russia.
Let us now come to NATO, which is the abbreviation of the North Atlantic Treaty Organization, created in 1949 to protect its members from armed attack. This basically means that any attack on one of the member countries meant that all other countries had to defend the nation that had been invaded.
Ukraine wants to join NATO but the Russian government fears because Ukraine’s NATO membership would mean all allied countries would be on one side and limit Russia’s access to the Black Sea. The Russian government fears that it will be closed by all NATO countries and that Ukrainians joining NATO will cause irreparable harm.
How is the Rest of the World reacting?
So, for starters When a country as powerful as Russia goes to war, what does a country as powerful do? In this case, the United States and its allies impose sanctions on Russia. Think of this as financial restrictions that will be imposed on Russia and agents operating in Russia.
The European Union and the United States are imposing restrictions that will make it difficult for Russia to borrow from investors in Europe. The United States will likely ban key businessmen from entering and doing business in America.
Currently, Germany has decided to suspend the final operating permit for Nord Stream 2, a 1,200 km pipeline that runs under the Baltic Sea and carries from Russia to Germany.
Now, all these restrictions not only hurt Russia, but also the countries that impose them. Remember in 2018, when America imposed restrictions on Russian aluminum giant Rusal, only after a few months the United States had to cancel the sanctions due to unintended consequences in the aluminum market .
Similarly, the restriction of the German Nord Stream 2 will suddenly increase oil prices, which could affect various industries, prices will rise and increase inflation not only in Russia, the United Kingdom or the United States, but also in the rest of the world.
What is the economic cost of a full-fledged battle?
In today’s time when nations are interdependent in more ways than one, any form of war would have far-reaching consequences. It is therefore not surprising that it has been a real bloodbath for the financial and commodity markets, with volatility visible in all asset classes.
The price of oil broke through $105 a barrel – the highest since August 2014. Russia could be a major exporter of oil and gas with an inordinate share of its supplies meeting Europe’s needs. The fear is that apart from wartime infrastructure losses, Western sanctions on Russia are bound to cause unforeseen disruptions to global oil and gas supplies. Not only oil, but other commodities will also experience higher prices until situations normalize. This rise in oil and commodity prices will aggravate already difficult inflationary conditions across the world.
The dark days have been painful for investors in all asset classes except of course. Indian indices fell 1.5% as of Feb. 24, 2022. India rose 22% in its biggest move in many months as the sell-off was more severe in the broader market than large-cap stocks . But, thanks to domestic institutions and retail investors, they were able to buy attractively and pull the market up a bit, rising 2.79% midway through Friday’s trading session. The yellow metal, on the other hand, hit its highest level in a year, true to its nature of being the only asset class to resist in times of distress and emergency.
What should investors do in these uncertain times?
Simple things to keep in mind when investing/trading in such volatile markets:-
1. Make sure your portfolio is well diversified – Diversification means diversifying your investment across different sectors rather than sticking to one particular theme or idea. Over-diversification leads to low returns and low risk, but a concentrated portfolio is a high-risk, high-return concept recommended only to experts in this field.
The job of the investor is to find a happy medium (between excessive diversification and concentration).
2. Buy value and buy cheap – Investors buying the dip should focus on quality trades backed by a strong balance sheet and high cash flow generation. Investors should avoid investing in less liquid market segments or turning to large-scale international investments. Practical advice for long-term investors should be to specialize in developments around the companies they invest in instead of following the geopolitical situation, which is both difficult and impractical. Find good quality, lower cost stocks that are experiencing a temporary downturn as these macro events are expected to develop once the situation stabilizes.
3. Maintain a disciplined approach to Mutual Fund SIPs no matter what is happening in the world. Do NOT stop your mutual fund SIPs, time the market unnecessarily. Ordinary investors like us can never anticipate such geopolitical events. We can, however, protect our portfolios or at least limit the impact of such events through disciplined Systematic Investment Planning (SIP). SIP makes it easy to average NAVs through market ups and downs. Always choose SIPs over lump sum investments, whether stocks or mutual funds.
4. If you are considering stocks for investment purposes, make sure there is a maximum margin of safety. The margin of safety is highest when one is not overpaying for the business. Valuations, healthy cash flow, strong ROE and ROCE, sustainable future profitability are some of the metrics that need to be tracked.
5. Consult with a SEBI Registered Investment Advisor (RIA) before investing
6. Avoid F&Os and Avoid Leverage in Highly Volatile Markets Unless Your Main Business Is Trading
Disclaimer: For educational purposes only, not to be considered a recommendation