The markets have been tough. Let’s dig in...

The Economics of War 🤺💱

The markets have been volatile since October but things have become worse since the war in Ukraine started. While the geopolitical tension itself should not impact the markets too much (as witnessed by analyzing the history of the impact of wars on market returns) with the Ukraine-Russia war Indian market has been seeing broader risks due to supply chain disruption.

Having said that, we could see the markets jump back up at a rapid pace once this conflict de-escalates. As seen in the chart below, the Nifty PE is at historically undervalued levels and has a huge scope to grow once the conflict is over.

Market Reaction to Wars -sharp pullback after panic ✔️

Nifty PE -scope to grow from historically low levels

How Ukraine-Russia war impacts Markets ⚔️

• Volatility- Panic, low sentiment, and broader volatility as a result of worldwide supply chain disruption
• Crude oil inflation- while India doesn’t import much crude from Russia, the rise in international crude prices will inflate input costs for Indian companies, thus causing a price rise.
• Other commodities- Coal prices are also skyrocketing as Russia is a major coal exporter. Agro commodities like wheat, sunflower oils, cotton will also be hit but might create an opportunity for Indian farmers to export.
• Fertilizer- Ukraine is a major importer of fertilizers to India and there would be disruption in the supply.

While the trade and corporate sectors might not see a direct hit, the global inflation in crude and commodity prices will be a worry for India. The banking sector seems to be robust in light of the crisis.

Fed Fund Rates 🏦

The prospects of rate hikes have been spooking the market even before the war. With crude prices rising the US inflation is not going to come down, which is why we can expect the hikes to come soon. Even though the FED might delay the hikes a little bit due to the conflict.

The Indian economy is inherently strong with good growth numbers and controlled deficits. We expect the hikes to have a moderate impact and the post-hike trajectory to be positive.

Nifty Returns after previous rate hikes

How we are performing? 🤯

All sectors and industries have struggled in the last 6 months and so have our portfolios. In light of the volatility, we have deallocated away from equities in most of our portfolios, and in multi-factor portfolios, we have added gold as well.

What’s the game plan? 📖

While we will be on the lookout for further deallocation if volatility escalates, we believe that in the long term the markets will be strong. This is the time to hold on to the conviction for the long term and not be bogged down by short-term noise.

In our portfolios Banking, Metals, and Energy allocations have increased recently and you’d see that we have shifted to large caps.

Here are our general recommendations:

• Sectors to look at - Banks, Energy and Metals
• Focus on larger stocks
• Add gold to your asset allocation 🪙
• Focus on high quality and value stocks
• SIP instead of lumpsum till the volatility goes away!