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The Effect of Russia-Ukraine on Different Asset Classes

The Russia-Ukraine conflict has been grabbing headlines all over. From a money standpoint, it’s got a huge number of investors worried, and rightly so. The Nifty 50 saw its biggest one-day fall since March 2020. Interestingly, since March 2020, the number of investors in India has also increased exponentially. In fact, half the existing investors that currently form the base have all been added post March 2020. These investors haven't seen market volatility or a downfall of this level since then.


Just as the pandemic was waning, the markets got hit by high inflation in the US, and a possible regression of central bank policy globally likely to come now. Read more: https://www.rupeeting.com/post/what-s-up-market. These tensions have only been aggravated by the new geopolitical developments in Europe.


The global financial markets are more interconnected than ever, and here’s how different asset classes have been reacting to recent developments:


Stocks: The equity markets saw a sharp drop since tensions started brewing, with further deepening with Russia sending its troops into Ukraine, and even more after the first round of sanctions against Russia by the West. Mostly, the downfall has been a result of (1) uncertainty, and (2) fears of a further increase in inflation (Russia is a major exporter of oil, gas and wheat). Within equities, mid and small caps have seen more of a downfall, primarily as investors become more risk averse. While stocks get impacted in the near term because of both geopolitical stress and inflation, in the long run, equities tend to outperform other asset classes.


Bonds: Bonds have been doing well or have been seeing an up-move as investors sell more equities and look for safe havens.


Commodities: Oil and wheat prices have been rising because of supply concerns. Russia is a major exporter of both these commodities. This has been sparking fears of a further increase in inflation, which is already a major concern globally.


Gold: Established is the trend of moving from risky assets to less risky ones. In this, Gold has been performing well, with ~5% of an increase in value in the month of February 2022.


International stocks: Like Indian equities, global equity markets have been seeing a downward trend, for the same reasons. The Nasdaq 100 too moved down this month, a little more than the broader Indian markets.


Crypto: Crypto is often believed to be an equivalent to Gold from the perspective that it’s decentralised. However, over the last three months, Bitcoin has been down 30%, putting that perspective at a questionable stance.


Run for safety

In confusion, the common thread seen across all asset classes, and within them is the run to safety. The movement from equities to bonds and gold, the larger downfall of mid and small caps, the badgering of internet stocks, the relative shielding of value stocks are al signs validating this thesis.


The only recommendation we have during this crisis is to stay diversified - across asset classes. For instance, Rupeeting Core Portfolios, which are all-weather portfolios made up of 5 different asset classes have all materially outperformed the Nifty 50. Our exposure to debt and gold have helped keep money afloat here relative to losing money in equities.


Within equities, movement towards large caps, stocks where there is valuation comfort, defensive sectors, and stocks which are relatively shielded from inflation has been working well, and is likely to in the near-term.

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