The Selloff Triggers in CY-2022
Geopolitical Unrest: The all-out conflict in the Eastern Ukraine with Russia has triggered panic among investors. This has led to aggressive selling in the equity segment for an extended period. The Russian index was down over -40% on 24 February 2022. Similar event happened in March 2014, when Russia took over Crimea. During that period, the Russian index RTSI lost over -53% in 9 months. Nevertheless, the market recovered while Indian equity market stood unhampered.
Pic 1 - Russia Index, RTSI Chart
Crude Oil Price & Rising Inflation: The Crude oil price crossed the $ 100 mark today (24th Feb) as the conflict escalated to a new height. The last price of over $ 100 levels was seen in September 2014. After that, it started to decline consistently till January 2016, marking a low of $ 27 per barrel. The impact of energy price is felt across the global with raw material price becoming dearer. In fact, the surge in raw material price had put pressure to company’s operating margin, and which is factored to an extend by the market. The stability will resume as the energy price starts to cool-off through a measured price tackle from the oil producing nations.
Pic 2 - Brent Crude, Price Chart
Shift in US Fed’s Policy: The year 2020-2021 was largely driven by cheap money and abundant liquidity in the global economy. The strategy to support the growth meant lowering the key interest rate to near zero levels. Now, the drastic shift in monetary policy from central bank to hike the rate aggressively has kept investors on risk-off mode. Again, from a past experience of 2013 during the ‘Taper Tantrum’, the impact on market was short-lived. The current policy impact will also be limited for a certain period as the market adjusts to this new policy regime.
Conclusion: It is likely that the equity market will remain negative to sideways in the next 2-3 months until the geopolitical and monetary policy are factored by the market. However, the market reaction/turmoil will be a temporary phase where smart money will hunt for a good bargain to build long-term portfolio. Therefore, it is imperative for retail investors to keep away with emotions due to ad-hoc events, and focus on long-term growth opportunity coming from the fearful market.
In the words of Warren Buffet, “Be fearful when others are greedy and greedy when others are fearful”.