As soon as Russia entered Ukraine and started the war, We have been seeing a huge drop in the stock market. Not just in the Indian markets but globally also across all markets, we could see a drop.
When we see that the trade between India and Ukraine is not even 0.5%, Despite this fact, whenever there’s a war between any country, Why does the market fall after the war?
Why Share Market falls During The Time of War ?
Let me tell you that when in 2001, the 9/11 attack happened, the market fell by 16%. In the year 1990-1991, when a war broke out between Iraq and Kuwait, the market dropped by 13%. And in between 1950-1953 when the Korean War happened, then also the market fell by 12%.
Now, because of this Russia-Ukraine war, the market again has dropped by more than 12%. We are going to talk about this today. And after a detailed explanation on this, we will also discuss what should the investors do in a situation like this.
Reason Behind Russia and Ukrain War
The reason behind Russia and Ukrain war is the Ukraine’s geography and NATO. That is, North Atlantic Treaty Organization. Many powerful countries like US, Germany, UK and France are the members of the NATO group.
NATO makes sure that all its member countries are sovereign and independent. Also, if they ever need military support NATO provides them that. But Russia is totally against NATO. And looking at their Geography, Belarus which is a neighbour country, is already on the Russia’s side.
But it is not the same with Ukraine. Ukraine declared sometime ago that they might join the NATO. And Russia had an objection to this. Therefore two months ago in December, Russia asked Ukraine for a guarantee that they would never become a member of NATO.
But Ukraine denied them any such guarantee. Russia feels threatened that if Ukraine joins the NATO, Then Russia will be encircled by too many European countries. Which can become a security threat for them in future.
Also Read : – All about IPO
Therefore to avoid getting into this situation, they pressurized the Ukraine and eventually this war began. Speaking of the fall in the market , let me tell you that this has not much to do with trading. Speaking of trading, we don’t even have 0.5% trade with Ukraine, We also do not have too much dependency on Russia.
Why Share Market falling
Many European countries are very much dependent on them. For Natural Gas and Crude Oil. But India does not buy much crude oil from Russia. Because their crude oil is a little heavy. And the transportation cost is also high because Russia is very far from India.
But because of this war, Crude oil and gold prices are growing very fast. And the danger of rising inflation is looming all over the world. Currently inflation rate in the US is 7.5%. Which is their highest in the last 40 years.
After 1982, this is the first time that the inflation has grown so much. After this war, it is estimated that it will grow even more. Which will lead to a lot of problems. But the question is, what does this war have to do with with the rise in the prices of Crude oil and Gold? Let me tell you that Russia ranks 2nd in Crude Oil production in the world. And third in the production of Natural Gas.
Also in the gold production, Russia ranks 3rd after China and Australia. Meaning for all these important materials, they play an important role. Maximum ports of the Ukraine are currently closed for trading.
But it does not affect Ukraine much because it plays a bigger role in the grain market. As far as Crude oil, Natural gas and Gold are concerned, they don’t play an important part.
If we speak of Russia, a lot of traders are a little afraid of trading from their ports. Because a lot of these transport companies buy insurances. But in this time of war, insurance companies are asking for own insurance. because here, there is a danger in transportation.
In case anything goes wrong, insurance companies will have to repay. Therefore the total cost is increasing. And the traders are also scared which has led to a lack in supply.
There is a simple law in economics, that if the supply is less and the demand is more, the prices will definitely rise.
Before moving ahead in the video, let me tell you that India has become an investor country from a saver country. Which is a good thing. But everyone is doing the same type of investment here.
To become an investor and to gain more returns, everyone is listening to some or the other tip. Or if somebody talks about a fund, they would go and buy it.
“Life is not an examination paper,Where every one gets the same set of questions. And you get successful by copying the answers from someone else”
When everything in life is different for everyone, how can the investment be the same for everyone. Please invest with carefully and firstly focus on learning not earning
Increase in the Price Of Crude Oil
The same thing is happening here. The prices of Crude oil is increasing, Gold and Natural gas is also increasing. I am telling you a very interesting fact here. Of all the European countries, 25% of their crude oil requirement is fulfilled alone by the Russia.
And 33% to 40% of their natural gas requirement is alone fulfilled by Russia again. That is, in this fight if they aggressively support Ukraine, it would create a very big problem for them. And perhaps for this reason they are not getting directly involved. And whatever sanctions they are imposing are also too less.
Also read : – Reason to Invest In gold
Now the danger on the whole world is that as soon as the crude oil prices shoot up, almost all the goods become costlier. For example, transportation becomes costly because of crude oil, Also, many industries are there, like the Paint Industry wherein more than 50% of the raw materials are crude derivatives.
like the Monomers and Titanium Dioxide. And when the prices of crude oil increase, the prices of crude oil derivatives will also increase. Because of which the raw material cost of the paint companies will increase a lot. Their margins will get affected.
Therefore the prices of the paint companies is falling a lot. Not just the paint companies, the prices of Tyre companies are also dropping. Because the raw materials required for the Tyre companies More than 30% of that raw material cost comes from Crude derivatives.
In the last few days, the share prices of the aviation companies has dropped by 10%. Because in their total cost around 35% cost comes from aviation turbine fuel.
Also, some people are also fearing that if more countries join this war, things will escalate and more risk factors will get involved in this matter. The crude oil prices in the last four months has increased by more than 30% and has reach 100$ per barrel.
If this war continues like this for a long time everyone is afraid that inflation will rise a lot and for almost every country it can prove to be a disaster.
Therefore the investors have become very pessimistic in the short term and are continuously selling their shares. Therefore we can see the fall in the market. But another set of interesting data states that after 6 months, all these losses will get recovered.
When the 9/11 attack happened, after 6 months, the market grew by 30%. After 6 months of the Iraq-Kuwait war, the market grew by 16% And after the Korean war, the market grew by 19% in six months.
It means that maximum number of times these things exists for a short time. And therefore the long-term investors do not have to panic much. Rather at this time, you would get many companies at great discounts. Which you can attempt to buy at discount. when the market is declining very sharply. Follow the simple rule of Mr Buffet, which you can follow.
“Be greedy when others are fearful and be fearful when others are greedy.”
Following this simple rule, you can conquer the whole market. So if we overall summarize this, we can say that if this goes on like this, inflation will rise a lot. Because of which the middle class and the lower class can get into deep troubles.
The profit margins of the companies can take a hit for some time, but the long-term investors will not be much affected by this. You just have to look for opportunities at this time period.
Falling in sharemarket due to Pandemic and war start normalising after the end of pandemic and war it majorly takes 6 months to cover all losses and so it impact only in short term period and if you invest for long term period you no need to fear after some time conditions will be normalise.
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