Isn’t it a good idea to look at the markets when there is bloo | Start Learning

Isn’t it a good idea to look at the markets when there is blood on the Street?

War presents a unique opportunity to buy quality cheap and smart investors got to be greedy when others are fearful.

Highlights
- War jitters have been short-lived, recovery predictable- Inflation bigger concern than war in Ukraine- Ukranian conflict unlikely to involve multiple nations now- Correction an opportunity to buy Blue Chip stocks- Indian recovery gaining momentum – earnings story intact- Be greedy when others are fearful

War is never a pleasant reality for anyone and, since equity markets hate uncertainty, the formal attack on Ukraine by Russia after weeks of posturing, met with jitters in global markets. Mirroring the global sentiment, the Indian benchmark Nifty went into a tailspin with a single-day fall of close to 5 percent on Thursday.

Drawing from history …
Geopolitical conflict tends to cause market volatility, at least in the beginning. Logically, investors may assume that the volatility will continue throughout the war period. However, history shows that this isn’t the case.
From the beginning of World War II to its end, the US benchmark Dow was up more than 50 percent, over 7 percent per year. During both the combined world wars periods, the stock market grew 115 percent.

The Vietnam War and the two Gulf wars are examples of conflicts that brought about extremely short-lived drops followed by long upward trajectories.
On an average, the S&P 500 (US) had been 6.5 percent in the negative territory for 3 months following an armed conflict (either global or smaller), and around 13 percent in the positive zone 12 months after the said conflict. But there are times when the market reactions have been more positive.

Source: Moneycontrol Research
Investors can, therefore, see some discerning trends here. War and conflict bring sudden crashes, varying in their degrees and depths. But usually, the recovery is relatively solid and predictable.
Markets worry more about inflation than a WW III
The reason why the current geopolitical tension is so crucial is because the armed conflict coincides with one of the highest threats of inflation since World War II. The Covid-led supply disruption, coupled with unprecedented fiscal stimulus, had already pushed inflation in most nations much beyond the comfort zone. Moreover, with a key commodity and crude exporter at the heart of this conflict, the escalation in commodity prices is here to stay.

Source: Moneycontrol Research
However, Ukraine being neither a member of the EU or the NATO, we do not see the Western powers getting involved on the ground at this stage. However, harsher western sanctions on Russia cannot be ruled out. The sanctions imposed so far are wide-ranging but they fall short in terms of severity. Russia is reasonably well prepared to face sanctions and the only meaningful blow could be the exclusion of Moscow from the global payment system. But given Europe’s dependence on Russian gas, a drastic escalation in tension, involving others, is improbable. In a larger war, it's possible to see trade disruptions, but a localised conflict in Ukraine is unlikely to incrementally affect global supply chains.

While every time market capitulates it seems “this time is different”, going by history, the armed conflict in Ukraine will not have a much long-term impact on the markets. Rather, we will continue to be led by the Fed and its policy changes with regard to inflation and overall interest rates. After a long run-up in global equities, war could be a perfect excuse to take profits.
Rather than worrying to catch the bottom, investors should gradually start nibbling at good quality stocks.