Contrasting War Scenarios & Markets

Sanjiv Mehta  |  2022-07-05

The probability of Russia Ukraine war resolution is higher in the 2nd half of 2022 as economic costs mount and that will be good for the financial markets.

The continuing Russia-Ukraine war poses a major risk. In a disturbing recent report, JPMorgan Chase & Co. analysts warned that the global oil prices could reach $380 a barrel if US and European penalties prompt Russia to inflict retaliatory crude-output cuts. Such a stratospheric price will of course be catastrophic for the world economy.

However, they rate the probability of such a scenario as low. In another note, they write about their expectation of a cease-fire between Russia and Ukraine in the second half of the year as the economic costs of the war become fully realized for many countries, including Russia.

They are confident that then the annualized inflation rate will get cut in half in the second half of the year, to 4.2% from 9.4%, which would “allow central banks to pivot and avoid producing an economic downturn.” Therefore they do not expect an economic recession to materialize anytime soon, but a reacceleration in global economic growth. Investors should brace for strong returns in the stock market during the second half of 2022 as the US economy avoids a recession.

Amidst such scenarios at the opposite ends of the spectrum, India has certain much-cited advantages including a big domestic economy growing at a good rate. Moreover, India by not imposing sanctions on Russia is able to buy some part of its Oil requirement at a lower price. The government has also imposed export duties on various products and is utilizing the proceeds to decrease excise duties so that the inflation and fiscal deficit do not get out of control.

It is probable that the Indian stock market might remain in a range with a slightly downward bias for some time before resuming its uptrend consistent with our medium-term projections. Indian rupee has declined further to around Rs 79.04 /USD. Oil prices continue to trade at high price with Brent crude trading at around 112 $ per barrel. Inflation numbers remain high and the central banks remain poised to increase interest rates further.

Consequently, it is important to maintain good amounts in your liquidity and contingency fund. Those should be in ultrashort-term debt funds in the current scenario of rising and volatile interest rates.

However, long term money should mainly be in well-chosen high quality diversified equity schemes. Additionally, the banking sector, given its valuations and the current economic cycle stage, is attractive. Infrastructure sector is also likely to perform well because of the government’s sustained push and spending. Technology sector in India continues to remain strong and is again attractive because of the recent correction. We are recommending keeping intact equity positions for goals with a time horizon of more than 3 years.