Throughout human history, we have been threatened by various crises. Some of these crises have been financial, like the banking and currency crisis, while others have been economic, like the debt crisis and the sub-prime crisis. But, perhaps the ones that we remember most vividly are social crises like food shortages and high unemployment, along with political and international crises like the current Ukraine-Russia conflict. While global markets have mostly weathered the initial shock of the Ukraine-Russia crisis, there are quite a few learnings that we can draw from the recent conflict.
In this blog, we will discuss how you should plan your investments during times of crisis to make the best of the situation. This will ensure that you do not panic or make emotionally-charged investment decisions that you will regret later. We will tell you all these things but let’s first take a closer look at how most investors react to a crisis.
How Do Most Investors React To A Crisis?
Irrespective of the type of crisis, there is always significant noise regarding the latest developments, and this noise inevitably impacts investors. The typical reaction of investors to a crisis is to panic and start selling their Equity investments even if they incur a loss. This decision to sell in a panic is often the wrong one yet it happens every time because of the overwhelming fear of further losses.
But even though you might not make a panic sale during a crisis, finding suitable investments during such periods can prove to be tricky. Some problems that you need to look out for when making investments during a crisis are – high volatility in Equity markets and chances of a double-dip recession.
The current crisis playing out in Ukraine currently seems to be following the same pattern. After the initial decline in Indian stock markets, the overall market has recovered significantly, yet there is definitely a lot of uncertainty regarding the future prospects of investments make during the current crisis. To get a better idea of how the current crisis might play out, let’s look at the impact of war on Equity investments.
What Is The Impact Of War On Equity Markets?
Most asset classes, sectors, and industries are adversely impacted by war. This is because war leads to trade disruptions, sanctions, higher inflation and tariffs and also a shortage of raw materials. Together these factors can result in a significant 10-30% drop in Equity share prices of many companies.
For example, during the current Ukraine-Russia conflict, the price of commodities like wheat, cooking oil, nickel, natural gas, and petroleum have increased considerably. This is a because both Russia and Ukraine export these commodities globally, and the current conflict has led to significant supply disruptions.
Due to this sudden increase in commodities prices globally, economies around the world, including India, will be impacted in the short as well as the medium to long term. But apart from the shortage in commodities and higher input costs, there is another reason for the correction in Equities during times of crisis. This is linked to the perception of investors and the fear that further corrections will occur in Equity markets.
Nonetheless, historical data regarding the longer-term performance of Equity markets following a crisis has shown a different trend. The below table shows the performance of the US Dow Jones Industrial Average after some key post-war crisis:
| Dow Jones Performance after Post War Crises (1948-1990) | |||
| Market Low Date | 1 Year Returns Post Crisis | 2 Years Returns Post Crisis | |
| Berlin Blockade | 19/07/1948 | -3.3% | 13.2% |
| Korean War | 13/07/1950 | 28.8% | 39.3% |
| 1962 Stock Market Crash | 26/06/1962 | 32.3% | 55.1% |
| Cuban Missile Crisis | 23/10/1962 | 33.8% | 57.3% |
| Kennedy Assassination | 22/11/1963 | 25.0% | 33.0% |
| Gulf of Tonkin Attack | 06/08/1964 | 7.20% | 3.10% |
| Stock Market Crash 1969-70 | 26/05/1970 | 43.60% | 53.90% |
| Stock Market Crash 1973-74 | 06/12/1970 | 42.20% | 66.50% |
| Oil Crisis 1979-80 | 27/03/1980 | 27.90% | 5.90% |
| Stock Market Crash 1987 | 19/10/1987 | 22.90% | 54.30% |
| Gulf War 1990 | 23/08/1990 | 23.6% | 31.30% |
| Average Market Appreciation | 25.80% | 37.50% | |
As you can see, the impact of war or other crisis on Equity markets has historically been short-lived. There has been a significant recovery within a year or two of markets reaching record lows. It is because, Equity markets typically adjust to the new reality within a short time, and growth returns shortly afterward.
A similar trend exists in the case of Indian Equities as well. The below table shows the impact of war and other domestic geopolitical crisis in Indian markets:
| Impact of Geopolitical Crisis on the NIFTY 50 (1999-2020) | |||
| 1 Day Returns | 1 Week Returns | 1 Year Returns | |
| Kargil War 8 May 1999 | 2.9% | 9.6% | 24.7% |
| Attack On Parliament 13 Dec 2001 | -0.8% | -2.3% | 0.0% |
| Samjhauta Express Blast 20 Feb 2007 | -1.4% | -3.5% | 19.9% |
| Mumbai Attacks 26 Nov 2008 | 0.1% | -3.5% | 81.9% |
| Surgical Strikes Across LoC 29 Sep 2016 | 1.0% | -0.2% | 13.9% |
| Pulwama Attack 14 Feb 2019 | -0.4% | -1.8% | 12.7% |
| Balakot Airstrike 26 Feb 2019 | -0.3% | 2.0% | 7.8% |
| Galwan Valley Skirmish 15 June 2020 | 1.0% | 6.7% | 61.7% |
As you can see, Indian stock markets too have historically managed to recover quite well within a year of the crisis. So, if you are a long-term investor, you should not follow the masses and sell your Equity investments when a crisis happens. Just focus on time in market instead of trying to time the market to benefit from your investments.
How To Choose Investments During A Crisis?
Any crisis, whether economic, geo-political or socio-economic, offers multiple opportunities to grow your wealth. In fact, historical data shows that periods of crisis often help investors generate excess returns, provided they choose investments wisely. The primary reason for this is of course, the behavior of investors in response to any crisis.
Typically at the onset of a crisis, investors usually decide to move their investments to sectors, industries, and asset classes that are considered to be “safe”. These include technology, utilities, consumer staples, and gold. While such investments can help control Equity portfolio losses to some extent, there is no guarantee that these investments will help create wealth in the long term.
A few smarter investors might choose a different option – short selling of stocks or index futures. A short-seller is able to make money from the fall of share prices or drawdown of indices. In simple terms, the short-sellers borrow shares they do not already own and sell them with the expectation that the shares can be available to purchase at a lower price later on. However, short-selling transactions are not simple as buying and redeeming Mutual Fund units, so this technique of benefiting from falling markets is not suitable for all investors.
How to Invest During Market Drawdowns?
During a drawdown in Equity markets, you can invest in high-quality stocks that are available at cheap valuations. To choose the best high-quality stocks during a crisis period, you have to consider some key criteria as follows:
1. Invest In Companies That Provide Essential Good And Services
During periods of crisis, opting for stocks of companies that provide essential goods and services is typically a good idea. This is because sectors that deal with essential items and everyday needs products like soap, milk, medicines, rice, etc. tend to do better during periods of crisis. In the case of other products or services, individuals might have the opportunity to postpone purchases, but that is not the case when it comes to essentials or everyday needs items.
Similarly, you should consider avoiding companies that operate in discretionary consumption segments like jewelry, automobiles, hospitality and entertainment, travel, etc. During times of crisis, the stocks of these companies might be available at a large discount, but such businesses typically take longer to recover and flourish post-crisis.
2. Find Companies That Control Their Own Supply Chain
Supply chain disruptions are to be expected during times of war. So it is natural for many companies to face raw material shortages that impact production. In such circ*mstances, companies that operate their own supply chain have a significant advantage.
This is because companies with direct distributors are typically able to normalize their supply chain faster than companies that use wholesalers. Similarly, companies that operate B2C channels on their own such as showrooms, diagnostic labs, etc. are better placed to rebound faster than companies that rely on a third-party.
3. Choose Companies That Support Its Stakeholders
Another factor to consider when you are investing during a crisis is the way in which a company manages the interest of its stakeholders. If a company is able to extend extra credit or give working capital loans to its suppliers, vendors, and distributors during a crisis, it is a sign that the company’s financials are strong.
A strong balance sheet indicates that the company is better placed to survive a crisis than its financially weaker peers. Moreover, if the number of market players decreases during the crisis, companies with a strong balance sheet can post significant gains in terms of market share by the time the crisis ends.
4. Companies Positioned To Increase Market Share
Typically, a period of crisis almost always leads to a shift in market share from unorganized to organized players. In effect, strong companies are made stronger by crisis, while weak companies become weaker and might even cease to exist.
So, you should invest in a company that belongs to a high-demand sector and has the ability to plug the supply chain gap. Such a company might be able to grab greater market share and emerge as a premium brand by increasing advertising spending during periods of crisis.
Some examples of industries that such companies can belong to include electronics equipment, supply chain, and logistics, textiles, footwear, packaged foods, etc.
The Smart Way To Choose Investments During A Crisis
If you have a well-diversified portfolio and rebalance your investments periodically, you do not need to worry about the short-term ups and downs of Equity Markets. The smart way to create a well-diversified portfolio that is rebalanced in response to market conditions is to become an ET Money Genius member.
ET Money Genius membership gives you access to 6 customized strategies based on your investment goals and personalized investment portfolios across Mutual Funds or stocks and ETFs. Some of the key benefits of ET Money Genius membership are:
- Multi-asset allocation across various asset classes in line with financial goals
- Risk management of your portfolio in response to changing market conditions
- Monthly one-tap rebalancing of your portfolio
- Consistent returns higher than the benchmark to reduce volatility and protect portfolio downside
Bottom Line
The ongoing Ukraine-Russia conflict is not the first crisis that has occurred, and we are sure to see other crises in the future too. The best way to overcome these crises is to ignore the noise, act rationally and stay invested for the long term. Investors who stay calm during periods of crisis not only grow their wealth in the long term but also tend to win big when markets rebound later.
