Russia-Ukraine War Sirens on: Advice for Investors

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What happened: Much to everyone’s disbelief, the war that the western leaders had been warning the world for months finally came true. Russia has launched a full-scale invasion of Ukraine, including the country’s capital of Kyiv. The Ukrainian 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 kept trickling in with claims of Russia hitting Ukrainian airbases. We do not have the capacity to predict how is the situation going to evolve but believe that this crisis has drawn and could draw more nations into the battlefield.

What led to the war between Russia and Ukraine?

It’s not a short or an easy story, so, to simplify the complicated things let’s go back to 1991 when Russia and Ukraine were still a part of the Soviet Union. Now, When the Soviet Union split most of the countries under SU became independent which included Ukraine and Russia. Ukraine was and as is strategically, economically, and politically very important from the EU and Russia’s vantage point. 

Let us now get to NATO which is short for North Atlantic Treaty Organization, established in 1949 to protect its members from an armed attack. This basically means any attack on any of the member countries meant all the other countries have to defend the nation that is been invaded. 

Ukraine wants to join NATO but the Russian government is fearing as Ukraine’s joining of NATO would mean all the allied countries are on one side and would restrict Russia’s access to the black sea. The Russian government is concerned that it is fenced by all the NATO nations and Ukrainians joining NATO would cause unrecoverable harm.

How is the Rest of the World responding?

So, for starters When a country as powerful as Russia takes on war, what does an equally powerful country do? In this case, USA and its allies are putting up sanctions on Russia. Think of it as financial restrictions that will be imposed on Russia and agents operating in Russia.

European Union and the US are imposing restrictions that will make borrowing difficult for Russia from investors in Europe. The US likely will ban key businessmen from entering and doing business in America.

Right now, Germany has decided to suspend the final permit to operate Nord Stream 2, a 1,200km pipeline that runs under the Baltic Sea and transports from Russia to Germany. 

Now, all these restrictions don’t just hurt Russia but countries imposing them too. Remember back in 2018 when America imposed restrictions on Rusal- Russia’s aluminium giant only after a few months the US had to roll back sanctions because of unexpected consequences in the aluminium market.

Similarly, the Restriction of Germany’s Nord Stream 2 is suddenly going to raise oil prices which in turn could affect various industries, prices will rise and rise inflation not just in Russia, the UK, or the US but the rest of the world too

What is the economic cost of a full-blown battle?

In today’s time where nations are interdependent in more ways than one, any form of war would have far-reaching consequences. Not surprisingly, therefore, it has been a complete bloodbath for financial and commodity markets with volatility visible across asset classes. 
Oil price crossed the USD105 per barrel mark – highest since August 2014. Russia may be a major oil and gas exporter with an outsized a part of its supplies catering to Europe’s needs. The fear is that aside from infrastructure losses thanks to war, sanctions imposed by the West on Russia are sure to cause unforeseen disruptions in global oil and gas supplies. Not just oil but other commodities are also going to witness higher prices till situations normalize. This rise in oil and commodity prices will worsen the already difficult inflationary conditions across the world.

It has been painful dark days for investors across assets classes except of course . Indian indices have lost 1.5% as of 24th February 2022. The India was up 22 percent in its biggest move in many months, with the sell-off being more severe in the broader market than just large-cap stocks. But, thanks to Domestic Institutions and Retail Investors they were able to buy at an attractive level and pull up the market a little as was up 2.79% halfway through the trading session on Friday. The yellow metal on the other hand shot up to its highest level in a year being true to its nature of being the only asset class to hold up during times of distress and emergency.

What should investors do in these uncertain times?

Simple things to keep in mind while 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 a particular theme or idea. Excessive diversification leads to low returns and low risks, but a concentrated portfolio is a high risk, high return concept recommended only to experts in this field. 

The investor’s job is to find a midpoint (between excessive diversification and concentration).

2. Buy value and buy cheap – Investors buying the dip should focus on quality trades secured by a strong balance sheet and high cash-flow generation. Investors should avoid investing in less liquid market segments or large-scale shifts to international investments. The practical advice for long-term investors should be to specialize in the developments around the companies that they’re invested in instead of tracking the geopolitical situation, which is difficult and impractical at the same time. Find good quality stocks that are cheaply available, are experiencing a temporary downturn because these macro events are expected to grow once the situation stabilizes.

3. Maintain a disciplined method toward mutual fund SIPs no matter what’s taking place around the world. DO NOT stop your Mutual Fund SIPs, do not unnecessarily time the market. Common investors like us can never pre-empt such geopolitical events. We however can shield our portfolios or at least limit the impact of such events through a disciplined Systematic Investment Planning (SIP) route. SIP facilitates in averaging out the NAVs through the ups and downs in the market. Always select SIPs over lump-sum investments, be it shares or mutual funds.

4. If you are considering stocks for investment purposes, ensure there is a maximum margin of safety. The margin of safety is highest when one isn’t overpaying for the business. Valuations, healthy cash flows, strong ROE & ROCE, future sustainable profitability are a number of the metrics that have got to be tracked.

5. Consult a SEBI Registered Investment Adviser (RIA) before investing

6. Avoid F&O and avoid leverage during high volatile markets unless your core profession is trading

Disclaimer: Only for educational purposes, not to be taken as a recommendation

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