As I'm writing this page on the morning of February 25, 2022, Russian military action in Ukraine is continuing on its third day - or perhaps I should say its eighth year - but I have no expertise on this, so I'll let it be. Let me focus on how this will or should impact our investing and savings activities.
Quite clearly, the movers of markets around the world seem to think that this is a passing cloud. The US equity markets had been falling for a few weeks now. In recent days, as some kind of conflict looked more and more likely, the decline had sharpened. However, the day after the action began, they turned upwards, with the S&P 500 index recording an increase of 1.5 per cent, which is quite substantial. It's notable that the Ukraine situation had no role in the decline during January.
The Indian markets too have done something similar. On February 24, 2022, when fighting had just begun in Ukraine, the markets fell by almost 5 per cent, which was easily the worst single day in a long time. The very next day, just like most markets around the world, the mood has lifted. Surely, as it happened with the Chinese virus, it would take a few weeks or at least days for the fog of war to clear and the way forward to become visible. Why the enthusiasm?
Here's my take. I could yet be wrong but I think the super-punters of the world in Wall Street and elsewhere feel that the European crisis will stave off the liquidity squeeze that was said to be coming. Recall that the broad global decline in earlier weeks was caused by a general expectation of tightening money. As I'd written a couple of months back, inflation in the United States is at a 40-year high.
There can be no doubt at all that this is because of the flabbergasting amounts of money that have been created by the Federal Reserve in the past few years, which has been on a money-creation frenzy. In 2008, the United States' money supply stood at USD 7.5 trillion. By 2019, it was more than double of that. Now, it has increased to USD 21 trillion. Late in 2020, someone calculated that more than 20 per cent of all dollars that existed had been created in the previous 10 months. I'm sure the figure is higher now.
Now, it seems that Wall Street has decided that with yet another crisis looming, the flood of money will not cease, at least for the time being. This is why markets have turned up again. Obviously, there's no way of predicting this. The Biden regime is extremely worried about inflation. Despite talk of massive sanctions against Russia, it is significant that the US has decided to let Russia's petroleum and gas operations operate unhindered because of inflation worries.
So, what view should investors take? I would say that keep reading the news but don't let it affect your investment outlook. You and I have no way of really looking into the future and figure out what happens to global liquidity or the conflict or Vladimir Putin's or Joe Biden's state of mind. However, the important thing to remember is that we don't need to know any of this unless we are punters who are buying and selling stocks within a few days' horizon.
The readers of Wealth Insight are not that sort of investors, I'm sure. With all these momentous events playing out, there's little doubt that volatility and perhaps substantial declines will be seen across stocks. However, the fact remains that the Indian markets are much more resilient to such shocks than earlier. Large domestic inflows, especially from equity SIPs and the EPFO, provide a cushion that was missing earlier. Some hiccups might be coming, but investors would do well to stay focused on the quality of their investments and not shy away from taking advantage of low equity prices.
At the end of the day, if you are focused on quality stocks, the weeks and months to come are going to be an opportunity to buy at a great value, more than anything else.
This editorial appeared in Wealth Insight March 2022 issue. To read the cover story and other insightful analyses, columns and articles