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.
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.
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.
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.
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.
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. 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.
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.
Typically, a period of crisis almost always leads to a shift in market share from unorganized to organized players.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.
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