Geopolitical Crisis and the Stock Market – What History Says

As always, the data and logic will provide a clear insight – and then it’s a leap of faith either way. Let’s look at some data points:

Global indices have generally been resilient overall, through wars and geopolitical events. If one looks at the crises triggered by war, especially globally, the markets tend to perform best after a period of 9-12 months.

While India has refused to take sides in the crisis, it will benefit greatly from strong undercurrents on the domestic front.

nifty 50 companies profit (EPS) has gone up over 55% in the last two years from 472 (FY20) to 735 (FY22E), clearly indicating that the pandemic has accelerated consolidation in favor of the organized sector.

Valuation, too, have softened and companies appear to be more reasonably priced. This is on the back of the fact that sectors such as infrastructure, real estate, BFSI are showing early signs of growth as well as below performance in sectors such as auto and metals, the risk reward ratio of investments to 15. -20% profit during the year is more favorable than a few months ago

Rupee Has shown remarkable resilience during the current crisis. This is not only a disclosure of the over $617 billion of foreign reserves that we currently have and the prudent monetary policies of the Reserve Bank of India, but also the fact that the rupee depreciation due to rising inflation in countries like the US has been minimized. Has been done. a significant degree.

Having said that, if oil prices continue to hover higher, the impact of inflation may come back to the CAD, and this could put pressure on the rupee. RBI has matured enough by talking down the market instead of announcing any knee-jerk policies. This augurs well for Corporate India going forward

Strong balance sheet across the board: Loan data not available for H1FY22. However, for 144 companies (ex-BFSI) out of Nifty 200 index, Operating Cash Flow (after working capital and taxes) increased by 18% for H1FY22. We believe that there are two barometers of the soundness of the financial system, i.e. amount of NPAs and Tier I capital adequacy. Despite this, despite multiple waves of COVID-19, the gross and net NPAs of 34 major listed banks for December-21 have actually declined by 5% and 23% each as compared to December-19 (pre-Covid).

FII flow no longer mandatory:For the past 3-4 months, DIIs have been supporting the market against FII selling and have added $13.3 billion while FIIs have pulled out $14.3 billion during this period.

Conversely, we don’t really know the impact of war if it goes on for a long time. Difficulties due to post-war economic decline rarely affected developed countries the way it seems to be happening now. It would be foolish not to expect a worldwide ripple effect for some time.

Having said that, I’ll err on the side of optimism and believe the market will be a very typical stock for the next few quarters. Substantial gains will be made by investors who are laser sharp in focusing on capturing trends rather than getting carried away with the noise. Nifty may be in the same range or slightly higher, but individual stocks will probably drive the alpha in one’s portfolio more decisively. Nifty 50 Forward PE is down 15% from its peak around 23 to 19. Finance, auto and FMCG appear attractive at current valuations as they trade below their 5-year averages and at or below their pre-Covid levels.

We believe that until inflationary pressures ease and the pace of recovery in the informal sector and better clarity on the outlook for rural demand, high-quality structural winners offer a better risk-reward in the current environment .

Disclaimer – Investment products are subject to market risks, please read all relevant fund related documents carefully before investing.

(Vikas M Sachdeva is the Chief Executive Officer of MK Investment Managers Ltd.)