Russia-Ukraine War effect on Stock Market

We have been facing a choppy phase in the market the NIFTY has slid quite a bit from its former highs made in Oct 21, and similar is the case for the small cap and Mid cap index.

Globally the carnage has been higher, and the impact of the fall has been far more pronounced in the US markets and talks of recession have started. The primary reason attributed to the fall in global markets is the current Ukraine-Russia war.

The Russian stock market index (MOEX) has dropped a whopping 60% from its peak in Oct 21 and is still placed about 45% off the peak. That is a huge drop compared to other markets.

Now I talk to a lot of retail investors and newcomers who have entered the market, and one thing one everyone’s mind is, why should other world markets react so bearishly too.

Not only Investors I meet, but also many of my friends and a large part of our clientele in NeoTrader, have been asking thru our webinars that why should one war in Russia and a fall in the Russian stock market affect India and the globe so much.

It’s a good question, which demands a sort of longish answer, so let’s divide this into two parts.

First up – Uncertainty

Markets hate Uncertainty – This is a thumb rule of investing and stock markets that many of us forget or fail to understand. Wars are certain – they create an environment of riskiness, and once such an environment is created markets will always react negatively. This has been an age old dictum, one can go back in time and analyze this and you will find the market’s reaction to wars have always been this way, (More so for the Russian stock market as it’s in the thick of things)

My second and more important point – The stage of the Market cycle

Markets always move in cycles, and how the market will react to an incident is always dependent on where we are in that cycle.

Globally, we are actually seeing a 13 year bull market and when news of a war comes on the back of a decadal up move the reaction is going to be more severe than what it would have been in the earlier stages of the bull market.  Once a BULL market matures it starts getting more sensitive to bad news, and this is exactly what is happening globally. In India, we may not have had a decadal bull run, but it has been a one way rise from the lows of Mar 20, and on the back of this rise, some correction is warranted – and this war has acted as the trigger for the ensuing correction.

Now coming to Point number 3, where do we go from here?

The Russian stock market seems to have made a climax bottom in Mar 22, and from there it is seen rebounding and is close to the 50% retracement mark. It might take resistance around the 50% market which also coincides with the moving average band, so there could be some consolidation in the MOEX going ahead, but more or less it seems like the worst is over for the Russian stock market.

Bringing back the focus to the NIFTY and our Indian stock markets, there has been significant amount of FII selling but the market has somehow managed to remain resilient. So I would suspect that we are in a market that is refusing to fall too much, but at the same time we do not have too many bullish triggers right now, to think of buying either.

Now, here is what one can do. Those with long portfolios that they don’t want to give up on, buy some protective puts. For those that aren’t so particular, shed some of the stocks and move to cash. For those that habitually trade long in futures, take a breath and stop, while matters become clearer. Those that can go both long and short in futures, be biased more to the shorts than to the longs ((where only some high conviction ideas should be played).

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