Saturday, February 26, 2022

The Ukraine crisis - what to do now?

Be Fearful When Others Are Greedy and Greedy When Others Are Fearful.

Warren Buffett

We seem to be living in a crisis ridden world nowadays. Just when the financial crisis unraveled by the Covid pandemic, that has ravaged entire economies and destroyed livelihoods worldwide, seemed to be coming under control, a new crisis has overtaken us. To be sure the Ukraine crisis has been simmering for a long time – just that it has taken war like proportions only now. As of the time of writing this post, there are reports of bombings in many cities in Ukraine by Russia and NATO members are in an emergency meeting to plan an appropriate response. Sanctions will be imposed on Russia by the NATO member countries no doubt – the question is whether they will also follow it up with a military response. If so, that could quickly escalate into a world war and the markets are fearful of this exact possibility.

Stock markets worldwide are deep in the red today in response to this crisis. The Nifty has corrected over 11.3% from the top with 4.5% of that correction coming just today. Many individual stocks have corrected much more than the Nifty. The point to note, however, is that the Nifty correction today is the fifth highest in the world markets after Russia (29%), Poland (10.3%), Turkey (8.7%) and Austria (6.4%). The reaction of the Indian market seems to suggest that the Russian invasion of Ukraine will have a significant impact on Indian businesses and Indian markets. There will be a ripple effect of this crisis on Indian also no doubt but I for one am not convinced that it will be on the same scale as that on the other East European countries. The days ahead will tell us more for sure.

But this crisis is not very different from the one that struck us in March 2020 during the onset of Covid. The markets had corrected steeply at that time too because of the fear of the unknown only to recover much more than the correction. The same pattern is repeating again now. Those investors who panicked in March 2020 and liquidated their holdings found it difficult to go back into the markets again at an opportune time. Consequently they probably lost more money than those investors who stayed invested during the crisis.

What to do now?
  1. First of all – do not panic. Realize that this crisis has affected every stock market worldwide only because institutional investors do not like uncertainty. They pull out their money in the face of uncertainty only to come back in again with greater momentum when certainty returns.
  2. Retail investors do not have the means to time the market and should avoid trying to do so anyway since it is a futile exercise. Rather, retail investors should remind themselves that they are invested for the long term and have time on their side. With the passage of time, every crisis will eventually resolve itself.
  3. This is also a good time to review your asset allocation, which may have become distorted due to the correction in the stock markets. Moving some part of your debt allocation to equities in order to restore your asset location may be a good idea at this time 
  4. The correction has also created many opportunities – because good businesses are now available at lower prices than before. If more correction follows, their prices will become even more attractive. If you already hold such good businesses in your portfolio, you can accumulate them if you have extra cash. If not, just sit tight and let this crisis pass 
  5. Inflationary fears are also looming large since oil prices are climbing swiftly due to this crisis. Rising interest rates will increase the cost of borrowing for growing businesses. Therefore at this time you should prefer businesses where the Debt to Equity ratio of the business is reasonable.

If you still have questions or doubts, reach out to your SEBI Registered Investment Adviser who will be guide you through this patch of global turbulence.

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