The Russian invasion of Ukraine – How to think about your investments now ?

You must have read up a lot of news articles and in all probability are tracking the war as it hits the one-month mark. So, I will not delve a lot in to the politics and the statistics about the ever-evolving situation, but will share my thoughts on how one should think about the potential impact on India and more importantly how to approach your investments – new and existing.

You may be aware that in the short-term markets are driven by sentiments, in the medium term the macroeconomic factors like inflation, monetary policy, fiscal policy and in the long-term earnings.

Because war is uncertain territory, sentiments will be on the low which means there can be pain in the short -term whether it is 3 months or 9 months we will have to wait and watch, but no one should try to guess the outcome as it would be just that, a guesstimate which does not help much. Situations are never static, they keep changing, gradually or suddenly. It is more important to stay on top of situations through proper foresight and planning, instead of just reacting to markets movements – up or down. It is like driving a car through fog, the road ahead maybe empty or you might crash in to something so, the best is to drive slow and not panic!

In the medium term, the biggest risk facing the world today is Inflation and India will have to face it too along with a rising Current Account Deficit (CAD). The current conflict has aggravated the situation with the Brent Crude oil prices touching $120 per barrel earlier this month. It is estimated that a 10% rise in global crude prices can increase the inflation by 0.4% and widen the current account deficit (CAD) of India by 0.3% of GDP as India is heavily dependent on crude oil import. This year the current account deficit was 1.7% of GDP so if the barrel of oil crosses $120, the CAD will settle north of 3% which is a yellow flag but still manageable. India enters troubled waters if oil hits $150 a barrel. Also, rising inflation means rising interest rates eventually, which hurts bonds especially long-term bonds. The US Federal Reserve is already expected to raise rates 6-7 times this year and India will soon have to follow. Rising interest rates help equities initially, it is only when they hit a peak that equities take a beating. So, in the mid-term i.e., next 18-20 months, expect the markets to be more volatile than usual.

From a long-term perspective the Indian markets are fairly valued, the earnings and the credit growth have been below average for a long time and the cycle has to revert to its mean which implies there is an upside in the long term which will be further enhanced by the recent reforms implemented in India, the China + 1 story playing out as the low-cost suppliers of the past to US an Europe are no longer reliable which will only help India’s manufacturing sector and last but not the least the demographic dividend which has already started to kick in which will lead to rise in per capita income read more discretionary spending and since India is a consumption led country , the earnings will follow.

Based on the above context, disciplined monthly investments in equities (SIPs) is the best strategy you can adopt now as volatility will help SIPs in the long run. You may not realize this, but the main reason Indian markets are holding up well despite the steady FII outflows for last 6 months is the Rs 11.000 crore SIPs that are flowing consistently every month, thanks to the retail investors like yourself.

On the other hand, if you have already invested lumpsum capital and your investment horizon is over 5 years, stay invested and ensure that the portfolio has moderate exposure to equity. How much, will depend on the policy guidelines that you or your money management firm have set, a good range is between 40-50% of your portfolio in equity. This will keep you portfolio protected from any additional negative developments. Same, if you are planning to put your investible surplus in markets because only equities will help you beat the rising inflation – as long as you maintain the right asset allocation, you will be fine.

What you should avoid like plague is trying to time the market now or in the future i.e., getting out of the markets now or delaying getting in, it is the worst mistake that individual investors make world over consistently as it goes against the fundamental principle of compounding. Also avoid investing in bonds with longer maturity and fixed income products like fixed deposits and recurring deposits unless you need your money in less than a year.

I want to leave you with the strategy of one of the best investors of the last century – Sir John Templeton. According to Templeton, he called his broker the day World War II began and instructed him to purchase every stock trading really cheap. This strategy helped make him a wealthy man. Still relevant for these times.