Tuesday's Talking Points
A year of the Russia-Ukraine War – India continues to tread strong!
In February 2022, when the world was hardly healing from the wrath of the pandemic, the threat of large-scale war began to materialise. On February 24, 2022, Russia initiated military operations against Ukraine, which has been met with significant resistance from Ukraine. Last week marked the anniversary of the war, but the hostilities continue with no signs of abating despite global efforts at peace.
The Russia Ukraine war is being considered amongst the largest and most dangerous military conflicts since the World War II on a global scale. Ukraine has received the support of a united western hemisphere – which has provided aid and technology to Ukraine worth EUR143.6 billion*, and imposed sanctions against Russia. The war has already seen casualties and humanitarian impact of a very large scale. Millions of people have been displaced and lost their livelihoods. Ukraine and Russia are key part of global supply chains for energy, agricultural products, among others. In a globalised world like ours, geopolitical events have far reaching impacts on economies, businesses, trade, capital flows, currencies, equities and bond markets. Source: Estimates by the KIEL Institute for World Economy
As one would expect, world markets reacted sharply to the threat of war. The one-month reaction to the war was significant from global markets. Commodity prices shot up significantly, with the Bloomberg commodities index up 13% in the month after the start of the war. Crude Oil was one of the most volatile commodities. Even global equity indices were hit, with the MSCI Emerging Markets dropping by 5% in one month.
Ukraine and Russia’s are key suppliers of commodities – share in global trade in 2019
While Crude prices shot up significantly, they have come off significantly in the recent months
Source: World Bank
Source: Petrol Planning and Analysis Cell
The direct impact was significant on European Union countries, as they suffered a crisis of energy supply with Russian gas being cut off. Europe has managed past the winter though, and come out with plans to accelerate its shift to clean energy. India was indirectly impacted, with crude oil being one of the largest items on its import basket. Along with cuts to estimates in global growth, India growth estimates were also cut by Indian and multilateral agencies.
A year after the war, supply chains seem to have ‘adjusted’ for new realities. Crude oil prices are now below pre-war levels. Global bond and equity markets continued their low to negative returns journey, but that can be attributed to higher interest rates and monetary tightening by global central banks. Inflation and interest rates are key risks to global markets, with the narrative for ‘higher for longer’ impacting markets.
India emerges as a key part of the global growth engine
In the past year, India’s growth story has received significant attention from the world. India continues to be among the fastest growing major economies. According to IMF estimates, India will contribute to 15% of global growth for 2023.
Apart from strong GDP growth, key indicators of robust growth in India include strong pickup in credit growth, rising direct and indirect tax collections, increasing FDI. Growth in the economy is also reflecting in the profits of Indian listed companies propelled by higher commodity prices and turnaround in profitability for banks. Indian listed companies profit to GDP touched 4.4% of GDP, from 1.6% of GDP in 2020. Consensus estimates from Bloomberg show that profits from Nifty50 index companies are expected to continue this growth, with Nifty50 EPS expected to grow at >25% over FY23-24E.
Having replaced the UK as the world’s 5 largest economy recently, India is growing in strength on the global stage. India has been active on the global stage voicing concerns around the war while also protecting its interests by procuring cheaper oil import contracts. Rising importance on the global stage improves our ability to source investments and favourable trade terms.
The War is now a Known Unknown!
In the October 2022 edition of our Monthly Musings (Link: https://www.hdfcfund.com/investor-desk/hdfc-mf-monthly-musings/have-geopolitical-risks-actually-reduced-now), we covered “The Known Knowns, Known Unknowns and Unknown Unknowns.”
Known Knowns are the things that we are aware of and understand. These are expected to happen and impact negatively, and are most likely factored into asset prices. The Known Unknowns are things we are aware of, but do not understand well. These may happen, but impact is uncertain, and can cause some market volatility. The Unknown Unknowns are the events that we are not at all aware of. These are risks that we have not thought of, and emergence of which can result in a sharp volatility in markets. While tensions between Russia and Ukraine were present since the past decade, full stage military conflict was in the Unknown Unknown zone.
A year after, while further hostilities cannot be ruled out, the war and similar military hostilities have moved into the Known Unknown territory. Hence, significant market volatility around such events are likely to be lesser – implying geopolitical risks have reduced! However, keeping in mind potential risks, investors must consider to continue to have an approach towards asset allocation, a goal-based approach to investments with a focus on keeping sufficient liquidity to ride out Unknown Unknowns.
Sources: KIEL Institute for World Economy, World Bank, Petrol Planning and Analysis Cell, Bloomberg, ICICI Securities, and other publicly available information
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