A phrase that we have heard at least a million times: We live in a globalized world. A world which flourishes and grows due to the network, interaction and integration among people, companies and governments. And it is globalization that has allowed us to accelerate as a race much faster than ever before. In theory and in practice globalization has been a great instrument to bring the world closer, generate revenue and make lives better.
But the current reality that we face is a rather scary one. As Ukraine and Russia stand on the verge of war and geopolitical tensions rise. It is an incident that’s happening over 5500 kilometers away from us that has the potential to dent, damage and destroy India’s economy (amongst other things). This is the ‘bad’ that the ‘good’ of ‘globalization’ brings with it. As communities around the world do not live in groups of 50 and produce and consume their own food and sleep but now stay collectively, use Chinese Mobile Phones, while wearing an Indian made T-shirt which has been sprinkled with French made perfume in their homes in Australia. We explore the black dot in the midst of the white sea in the yin yang of globalization and the power and potential it has to ravage India’s economy and how we can stay prepared.
The world has experienced global level wars in its history. Let us look at how financial instruments perform during wartime and what we can expect in the event of another war.
In the case of wars, primarily three things take place:
1. Supply chain disruption:
This essentially means that during wars nations stop trading with each other in order to protect the resources they have. Logistics takes a hit, as movement of cargo, roadways, air traffic comes to a complete halt.
2. Money Flushing
Governments throughout the world start printing and injecting more money into the system as there is an increased need to spend on more resources like weapons, transport arrangements, food production, rehabilitation and safety.
3. Bond Action
Bonds are debt obligations issued by the national government to support spending. Basically, the government gives you a contract in exchange for your money, promising to return it with an interest. Governments want cash liquidity and hence tender bonds to generate money from the market.
All the aforementioned three actions directly contribute to Inflation, which is the general rise in price of goods and services. Fundamentally meaning that 100 rupees would be worth much more pre-inflation than post-inflation. If you go to a supermarket, those 100 rupees would have gotten you more things pre-inflation than post-inflation. Wars always end up creating high inflation. In our recent memory, we have seen all those three actions happening, not due to a war but due to a pandemic, which has raised the inflation in the economy.
Also this means that one should not be holding excess cash in wartime. Only cash that is required for essentials should be kept on hand. Because cash will soon lose its worth and inflation shall wipe out its value.
FDs and Bonds:
We have always been told that FD’s are safer instruments and we should invest money in those asset classes. But this is not true for a wartime like situation. The return on bonds and FDs is inversely proportional to inflation and because we know that inflation shall sky rocket. These asset classes will tend to go down in value. Which means that bonds and FDs are only valuable investments in a normal economy when inflation is under control.
A commodity that is unpredictable, global wars generally push up gold prices in the short term but there is no guarantee. They can fall too, and they have too. Buy it, if you are feeling lucky. But in the long term this should definitely be a safe return.
Equity and Stocks:
Stocks and stock markets tend to perform adversely and poorly whenever there is a potential danger to world trade. Which is exactly the situation we are in right now. If countries put sanctions against Russia for aggressing on Ukraine, it impacts world trade and thereby impacts businesses. As trade and stock markets are caught in the crossfire of sanctions and retaliation, stocks perform poorly. But no countries want trade to flourish and prosper. So there might be no sanctions at all. Trade is what keeps stock markets going.
According to reports from various research firms like the CRA and CFRA, it is clear that stock markets drop down severely on the day of an unfortunate event or attack and take on an average 47 days to recover from that point. “While war is, of course terrible and destabilizing, it turns out that conflict can bolster portfolios in the long term”, says the institute. Equities and stocks markets rise beating annual average returns otherwise. Markets have always gone up after war subsides, this is what data tells us. Making equity and stocks the best investment class during wartime.
What will not change!
Although to be honest, due to diplomatic talks and de-escalation there is a large enough probability that we won’t see any war but now you know what to do when global disruptive events occur and how you can be better prepared for all of that. While all of that changes, one thing will always be there- taxes (might be more, might be less, might be delayed, might be advanced, but they’ll be there) and for that we at Quicko, are here.