Russia-Ukraine: Plus-Minus Scenario for Economies, Investments



If getting battered from COVID-19 wasn’t enough, the global economy is yet again tossed for a spin caused by Russia’s sudden attack on Ukraine. Food prices, fuel inflation, energy and raw materials are swayed around affecting supply chains, threatening investments and global economic growth. Yet this abrupt impact is only hindering the global economy that had slowly gained momentum after the coronavirus’ strike.

Russia’s economy is also not spared, as the pressure plugged the plug of its central bank’s access to the $ 630 billion in reserves it holds internationally, including a restraint on the Swift interbank messaging system that facilitates cross-border payments. Nevertheless, the devastating conflict has been pulling out issues after another threatening increase in inflation and prices of commodities.

A Slap on the Commodities Prices

Least a lengthy Ukraine invasion might raise oil prices by increasing the likelihood that some of Russia's critical petroleum supply could be halted.

While rising energy prices may reduce consumer spending, they may push the CPI (Consumer Price Index) inflation rate above eight percent. Even if economic growth sputters, the Federal Reserve may be compelled to press on with its plan to significantly tighten monetary policy.

“If anything, this aggravates the inflation problem in the US”, said  Krishna Guha, vice chairman, Evercore ISI. “It makes it harder to achieve the soft landing” the Fed is trying to execute.

A Surge in the Defense Expenditure

Yet, global defense expenditure is expected to shoot up. Many analysts and professionals believe that this could be a blessing in disguise, and that investors can use it to construct a strong portfolio by taking holdings in fundamentally excellent stocks. Some of them also advocated for a 'wait and see' attitude until more clarity on the Russia-Ukraine situation emerges.

Saurabh Jain, Assistant Vice President - Research at SMC Global Securities said, "After the outbreak of the Ukraine-Russia war, chances are high that global defense expenditure post-war may go high. Recently, Germany has announced to increase its defense expenditure and other European Union countries are expected to follow shoot."

Anuj Gupta, Vice President of IIFL Securities, believes that the current geopolitical tensions will exacerbate the situation in Taiwan "The Russia-Ukraine crisis is predicted to exacerbate the dispute between Taiwan and China, resulting in a significant increase in global defense spending. This will have an impact on Indian defense spending, and the Indian government would be forced to increase its defense spending as a result."

Saurabh Jain of SMC global said, "One should look at those defense stocks that have a long history of catering to the sector and have a strong face value in the market. From this perspective, I would bet upon Bharat Dynamics, Bharat Forge, Bharat Electronics, Hindustan Aeronautics Limited and L&T shares to buy today."

If someone has a limited amount for investing; Anuj Gupta of IIFL Securities said, "Out of these 5 defense stocks — Bharat Electronics, HAL and Bharat Dynamics are better placed on chart patterns and they might yield higher than other two defense stocks. One can buy Bharat Electronics at CMP for medium term target of ₹280 maintaining stop loss at Rs.185 levels. Those who want to buy HAL shares, can initiate momentum buy at CMP for a mid-term target of Rs.1800 maintaining stop loss at Rs.1180. Likewise, One can buy Bharat Dynamics shares at CMP for a mid-term target of Rs.580 maintaining stop loss at Rs.380 apiece levels”.

But an Opportunity for the Stock Market

On a year-over-year basis and sequentially, the top and bottom lines of Nifty components increased at high double-digit rates. Capital goods, banking, power, information technology, and metals are among the industries that performed well, whereas auto, pharmaceuticals, and cement had a difficult quarter.

“Given the present jump in commodity and crude prices as a result of the geopolitical scenario, inflation may rise more in the future.  This is undoubtedly a short-term threat for businesses and may postpone the economy's broad-based recovery. However, given that corporate profits have remained resilient, that management guidance across sectors has been mainly positive, and that India is experiencing many structural tailwinds, the current collapse in our markets appears to be transient”, says Yesha Shah, Head of Equity Research, Samco Securities.


Season for Long-Term Investment

Vijay Chandok - MD & CEO, ICICI Securities says medium to long term thesis on Indian equities remain intact amid economic recovery as reflected by key macroeconomic indicators, strong capex spends and robust corporate earnings (Nifty earnings growth likely at 21.5 percent CAGR over FY21-24). We continue to see this correction as an opportunity for the investors to add on the companies with sustainable growth visibility.

Nitin Raheja, Executive Director, Head – Discretionary Equities, Julius Baer, says the current correction is more of a bull market correction which tends to be in the range of 12-15 percent on an average. “A large part of which has been done till date. Further individual stocks have corrected even more and there is a case for gradually buying into the markets using a bottom-up stock specific approach”.

Nifty to Rise

Shareindia's Vice President and Head of Research, Ravi Singh, believes that investors should take a cautious approach at this time.

“Nifty may touch the level of 15500 in this scenario. It is advisable that all investors should follow a wait and watch strategy and avoid any fresh entry at the current juncture. Long term investors having an investment horizon of 3-5 years will get a good opportunity to avert their portfolio once the global situation stabilizes”.

Regarding Nifty50, Shah advised that, “the bounce, hence, can be a good exit opportunity for short-term traders. Until Nifty breaks above 17,500 levels, we suggest traders maintain a bearish outlook. Immediate support and resistance are now placed at 16,200 and 16,900 levels”.

Need for Balanced Portfolio

Investors should remain cautious in the future, closely monitoring developments in the Russia-Ukraine conflict, according to Vinod Nair, Head of Research at Geojit Financial Services. He advised that a wise approach in such a turbulent market is to have a balanced portfolio with a mix of stock, debt, gold, and cash.