Investment decisions in the time of war !!

How does a war that is raging miles away impact global financial markets?

And no matter how far away we are from the whole situation, the war is going to impact us.

Russia v/s Ukraine is all over the news.

 

But how?

Stock Markets & the war….

Every newspaper in the world has just been reporting stock market crashes since Russia invaded Ukraine a few days back. Even the Indian stock market plunged by around  5 % and the investors lost around a whopping Rs 13.75 Lakh crores.

But why does a war in some other part of the world impact all the stock indices?

It has largely to do with the human psyche. 

The stock market has always been an investment instrument that people consider high risk. And rightly so. 

They don’t want to trust it blindly in times of uncertainty. So, a situation like a war causes panic, leading to massive sell-offs. 

However, this panic is usually short-lived. Smart investors begin to buy the dip (pick up stocks at low prices thanks to the sell-off) and the market mostly goes up again in a few weeks. According to research by CFRA, the average time taken for markets to recoup losses is 28 days.

This is exactly what happened during the last World War III scare in 2020 when the US conducted a drone strike on an Iranian general.

The markets went into panic mode but were soon back to normal.

However, these fears can be well-founded if a war does happen. 

Supply chain crises, rising inflation due to shortage of goods, and other such factors can eventually eat away at a company’s profits, causing stocks to decline in the future. So, it makes sense to sell some iffy stocks, and invest the funds in safer investments or keep it in hand as a precaution.

But analysts predict that the current situation will not have a long-lasting impact on the markets. Plus, most investment gurus like Warren Buffett suggest that you should keep your stocks and buy more when there’s “blood on the street”.

Meanwhile, where the stock market starts tanking even at the talk of war, the prices of commodities start to rise.

 Commodity Play…. 

One of the first commodities to rise in the time of war is oil. It literally fuels the war in a big-big way. Even during peacetime, most countries have to import oil at least in some quantity. And the war makes the supply of this oil uncertain. 

 

Hence, the prices go up. 

Right now, oil prices are at an 8-year high of $101/barrel.

And it’s not the only commodity touching the skies. Gold is also at an eight-month high.

Why gold?

Because gold is considered a “safe-haven” asset. This is the asset that people buy when they no longer have faith in other investments.

Here again, the human psyche comes into play. For centuries, humans have believed gold is valuable, probably because it was used as currency. That belief and the fact that gold is a physical asset you can hold and feel, often cause investors to buy or invest in gold during times of crisis

And it’s not just gold. Silver has also been gaining for the same reason.

Prices of other metals like aluminum, copper, nickel, and so on also usually rise during times of crisis or war because of their tangible utility. A lot of countries also import metals like nickel and cobalt, which are now needed in several electronic items. 

This reliance on imports makes their supply unreliable, which also plays a role in increasing prices.

Presently, aluminum prices are up 3% to about $ 3380/tonne, nearly touching an all-time high set in 2008, while nickel prices have hit a nearly 11-year high of $ 24,870.

Several other commodities are also impacted depending on their supply and demand and the regions involved in the war. For instance, the current war is expected to raise the prices of grains as Russia and Ukraine are both major suppliers of grains. The same goes for natural gas, of which Russia is the largest exporter.

So what should an investor do in such times of uncertainty? 

If you are invested, stay put and wait for geopolitical events to settle down.

If you want to buy stocks, then invest small and at regular intervals.

Park at least 10% of your investment into safe-haven assets like Gold & Silver

Continue with your SIPs.Volatile times are the  best, for returns from SIPs

Some products in the mutual fund space, are designed for safety and are excellent options in such uncertain times. The schemes in Balanced Advantage & Asset Allocation categories are excellent bets here. Must be utilized for lumpsum investments. These categories are ideal for participating in equity markets without worrying too much about market levels & valuations. The net equity exposure of the schemes changes automatically based on market valuations.

 

Have patience….Keep your focus on your long-term goal. Your fund managers are navigating wisely…….This too shall pass !!!