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Once again, the citizens of the world find themselves to be in unprecedented times. With Russia attacking Ukraine, everything has gone tizzy, and the markets have not been spared either. Ever wondered how wars affect the markets? Here are five key points to know:
Why do wars impact the markets?
Wars signal uncertainty. According to the Swiss Finance Institute that analyzed conflicts in the US after World War II, there is a war puzzle at play. The economists noted that right before the war breaks out, the stock prices are usually low in anticipation of the conflict. However, once the war breaks out, the prices shoot up, though the economists don’t exactly know why this happens. However, this may not always be true. Take, for instance, the time Nazi Germany attacked Czechoslovakia in 1939, and France in 1940. In the next 22 days, the S&P 500 fell by 20.5% and 25.8%, respectively. Similarly, during the Pearl Harbor attack, S&P 500 dropped around 11% within a single day after the attack. And the trend continues as the S&P 500 saw a sharp one-day decline since May 2020. It is also worth noting if the war was not expected, the sudden event tends to decrease the stock prices.
So why do stock prices go up and down? In an interview with the New York Times, the father of efficient-markets theory, Eugene F. Fama explained that speculative prices tend to fluctuate as a response to sudden uncertainty. He added, “People are continuously trying to evaluate information. But it’s impossible for them, given the amount of uncertainty that’s out there, to come up with good answers.”
Do markets stabilize when wars end?
Even when wars come to an end, there is a long period of instability that is never favored by investors. This also impacts the markets adversely. Moreover, in case of the current crisis, the various economic sanctions imposed by the European Union such as excluding Russian financial institutions from the SWIFT system will have a negative effect on the Russian economy and foreign trade regardless of the outcome of the conflict.
What’s interesting is that not all stocks get impacted the same way during a war. Usually, it is the travel and leisure stocks that take the biggest and the most immediate hit. Prices of bank stocks also tank as central banks adopt a conservative approach to combat inflation and raise interest rates. On the other hand, stocks of military electronics technology companies may witness a rise due to the increased demand. The current crisis also affects commodity prices such as oil and gas since Russia is one of the world’s largest oil producers and the imposed oil sanctions certainly disrupt the supplies.
How is the Indian market impacted due to the Ukraine-Russia war?
While India is not directly in the line of fire, the stock market is experiencing secondary and indirect impacts.
Prices of metals, gas, edible oil and crude oil shot upright from February 2022 and can increase even more in the coming few weeks. The rupee has also weakened significantly due to the sanctions and the ongoing war. Rising interest rates by federal bank in the US has also made FPIs anxious about their investments. Lastly, with Russia getting excluded from SWIFT, the export market has taken a direct hit.
But this doesn’t mean all hope is lost for domestic investors. Long-term investors can still benefit from the market provided they have at least a three to five years horizon. This is also the right time to undertake asset allocation as your kitty needs to have assets that can provide regular income, capital appreciation, inflation protection, and adequate protection against situations such as wars. Since no financial advisor can predict the end date of this conflict, the best approach would be to opt for low-risk debt instruments or ETF rather than putting all your eggs in high-risk instruments.
What can you do to safeguard your interests?
But this doesn’t mean all hope is lost for domestic investors. Long-term investors can still benefit from the market provided they have at least a three to five years horizon. This is also the right time to undertake asset allocation as your kitty needs to have assets that can provide regular income, capital appreciation, inflation protection, and adequate protection against situations such as wars. Since no financial advisor can predict the end date of this conflict, the best approach would be to opt for low-risk debt instruments or ETF rather than putting all your eggs in high-risk instruments.
While market conditions are not in your hands, with patience and a strategic plan, you can still invest and make the most out of it. If you need help deciding where to invest amidst this turmoil, get in touch with the Moneyfront team right now.
