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World War 3 & Impact on your portfolio - YouTube
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hi everyone welcome to today's video so
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there is a lot of news that is going
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around the russia ukraine war that is
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going to take place how it will escalate
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into the next world war and how the
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stock markets all across the globe are
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going to vanish and all our portfolios
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are going to become 0 very very soon so
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that is the narrative that is being
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played out so through this video i am
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going to present an economic argument as
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to how different asset classes cash gold
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bonds stocks how do they perform during
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war time we will look at some historic
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facts and accordingly you can balance
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your portfolio by making a more informed
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decision so this will be a short but
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very important video so please stay
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tuned till the very end before i jump
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into the nitty gritties of the video
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very quick shout out to our sponsors for
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today which is golden pie they are an
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case you are looking to buy bonds you
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can check the links in the description
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box as to how you can invest in bonds by
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using golden buy now let us understand
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whether it makes sense to invest in cash
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invest in bonds in western stock markets
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during a war time like situation so
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first and foremost let us understand
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that if ukraine and russia are going to
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a war and the entire world is going to
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get embroiled in a war then does it make
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sense for us to hold everything in cash
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or how much cash should we be holding
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whenever a major war breaks out there
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are three things that happen one is that
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there is supply side shock so supply
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side shock simply means that all the
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supply chain gets disrupted that nations
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will not trade with each other movement
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of ships or cargos will stop similarly
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roadways will stop similarly air traffic
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will come down so all these things will
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happen and the supply side shock will
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contribute to inflation because there
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will be fewer goods that will be
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delivered in the economy
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second key thing in order to deal with
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the war-like situation the government
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needs to print more money because they
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need to undertake a lot more expenses
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they will have to buy more weapons make
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logistical arrangements and bunch of
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other different different things due to
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which they will print more money this
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again leads to inflation third and
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finally there is bond action in fact so
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just to tell you a very interesting
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story that during world war 1 and world
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war ii government issued something
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called as war bonds these war bonds
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simply meant that your government will
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come to you and say that you know what
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we are going to fight a war do you want
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to support your nation in fighting this
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war if yes purchase this bond so
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purchasing the bond means that if i want
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to support my nation in terms of
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fighting the war i will give my
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government certain amount of rupees
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let's say 1 000 rupee and i will buy
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that bond from the government now
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interestingly that war bond did not pay
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me and it was pretty much at a
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break-even price but i supported my
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government by buying that bond why
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because of the nationalistic pride so
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that is a very brief but interesting
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history about the war bonds but coming
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back to the topic that all these three
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actions contribute to inflation now what
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is inflation inflation is the general
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level of price rise in the economy and
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war ends up creating high inflation now
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you would have seen that post 2020 the
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inflation in the economy has been very
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high why because 2020 covid also led to
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something very similar that there was
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supply side shocks there was excess
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money printing there was excess bond
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actions also so all that has also
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contributed to inflation in the economy
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and as we are sitting us is depicting
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very high inflation india is also
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depicting high inflation bunch of other
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emerging economies are also depicting
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high inflation in a war time also this
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high inflation is going to persist and
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what is it that you should definitely
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not do in a high inflation period
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you should not be holding a lot of cash
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yes there are two parts to this one is
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that of course you need cash for your
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immediate expenses if you are holding 10
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lakh rupees then don't convert
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everything into cash just because a war
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like situation is going to break out
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because of high inflation all this cash
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will become dust very very quickly it's
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better to keep your money in different
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assets that i am going to subsequently
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speak about but yes when it comes to
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cash during a war-like situation please
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don't keep your investments in cash keep
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cash only for expenses now comes your
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second option that you can go and invest
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your money in a bond market because many
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of us would feel that okay bond safer
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instrument so during a war time if i am
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investing my money in a bond so at least
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that will not become dust and i will be
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able to preserve my wealth are you
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correct the answer is no so here is a
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paragraph for you to read this is a very
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interesting paragraph so this was a
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research that was done by cfra and cfa
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institute so the paragraph says that on
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the bond side fixed income tends to
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underperform during a crisis because
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because inflation has been higher during
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war times bond returns have historically
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been negatively correlated with
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inflation so all they are simply saying
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is that if you are looking to invest
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your money in fixed deposits or any
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other bond instrument during a period of
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crisis because again the return of bonds
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are inversely related to inflation so if
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the inflation is high bond returns are
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low and if the inflation is low bond
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returns typically tend to be high now
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parking the war discussion aside for a
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minute here what is happening in the
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economy right now is what that you would
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have seen that u.s very high inflation
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almost seven percent india very high
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inflation pakistan extremely high
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inflation sri lanka turkey extremely
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extremely high inflation now what is
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happening all the governments for
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example u.s government or u.s feds have
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increased the interest rate now they
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have increased the interest rate why
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because they want to bring down this
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inflation to a normal level like 2 3 4
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level now the moment this equation plays
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out bond investments might become very
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very attractive so that will be a great
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time to start investing in bond and
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again you can go check out golden pie
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it's a wonderful platform for bond
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investing and there is a series of
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listed options that you could consider
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taking your positions in but yes to cut
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the entire story short in a war-like
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situation bonds become a bad instrument
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simply because of the fact that the
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inflation becomes really high in a
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normal economy when the inflation is
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under control bond becomes an attractive
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instrument to invest in so now let's
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talk about the third asset class which
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is gold now you would feel that okay
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during a time of crisis the gold prices
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will always go up for example when 2020
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covet crisis hit the gold prices went up
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similarly any type of major crisis in
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the world that happens gold prices
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always tend to go up so does this hold
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true during the time of war also and
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here is a very interesting chart for you
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to take a look at it does not capture
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all the wars that have happened but it
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does capture some of the important
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tectonic events so you can see that
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during iran revolution the gold prices
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went up then iran-iraq war again gold
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prices went up then they came down very
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quickly during iran-iraq ceasefire the
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gold prices went down same goes for
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iran's invasion of kuwait again the gold
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prices came down 9 11 attack the gold
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prices went up iraq war gold prices
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again went up so gold prices are really
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difficult to predict but there are two
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very important points that i would like
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to outline
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one is that gold prices are extremely
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cyclical and long term now what does
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that mean for example right now post
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2020 gold prices have given an up run
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now gold prices tend to be really long
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so if they go up they go up for a while
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and when they start coming down they
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come down quite a lot and when they
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start coming down the prices stay
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depressed for a very long period of time
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so gold is highly cyclical and it is
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very long term oriented asset since gold
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has already given very high returns very
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recently i don't think that if a
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war-like situation breaks out right now
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it will give a massive up-run now second
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key point that you need to remember is
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that the supply of gold is managed it
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might appear that gold just comes into
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the economy on its own it just manifests
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itself no actually governments all
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across the globe decide how much supply
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of gold they want to maintain in the
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economy and that becomes one of the
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primary movers of gold and also from the
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consumption or demand side governments
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are the biggest consumers of gold so the
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point is that government decides the
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supply and government decides the demand
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so from that particular perspective gold
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is a risky asset right now from an
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investment point of view to invest all
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your money keeping a little bit of
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exposure to gold is fine but don't bank
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on gold by assuming that in a war like
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situation gold prices are definitely
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going to go up there are absolutely no
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guarantees especially now when gold has
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given such a massive run-up now let's
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discuss the most important asset class
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that we all are very interested in as to
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how stocks are going to behave during a
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war time situation now before i share
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some historic facts let me present one
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simple argument here that the stocks
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tend to do really badly when there is a
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danger to world trade what do i mean by
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that if for example russia and ukraine
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get into the war and us and europe put
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successful sanctions on russia and tell
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them that you know what we are not going
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to trade with you that stops the world
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trade or impacts a world trade to a very
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large extent that is a bad situation for
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businesses because businesses get
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directly hit due to that move russia
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will further put sanctions on u.s and
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bunch of other different countries as
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retaliation then more retaliations will
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come in then further lobbying will
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happen so that just disrupts the entire
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business world and that is what is bad
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for these stocks just because a war has
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broken out does not mean that these
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sanctions are definitely going to take
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place this is a very important
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distinction and let me help you
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understand this viewpoint by talking the
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example of russia and crimea war
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so in 2014 there was a war that broke
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out and russia ended up annexing the
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crimean peninsula which was a part of
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ukraine now i am not an international
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relations expert
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but this was a very big world event that
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took place in 2014. now during that time
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us european union they all criticized
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russia's action they said that okay here
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you have done really bad this that shame
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on you blah blah right but bottom line
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is that u.s and european union they
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ended up putting no sanctions on russia
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why because that would have created a
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negative impact on both u.s and european
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union also now in 2021 the entire world
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is reeling through the covet crisis
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economies all across the globe are in a
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very vulnerable shape the world is not
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going to say that okay you know what we
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are not going to trade with china they
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are polluting the world we are not going
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to trade with russia they are an
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aggressor nation we are not going to
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trade with this particular country or
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that particular country you can't do
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that because that hurts everyone's
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country so that is the argument against
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imposing trade sanctions now i don't
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know whether a full-blown war will break
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out between ukraine and russia but it's
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very given that in 2014 when the world
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was still in an okay condition if u.s
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and eu could not put any sanctions on
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russia what makes us believe that in
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2022 the world is going to take strict
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actions against russia but let's assume
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the worst case scenario now if there is
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a war that breaks out between ukraine
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and russia what is it that is going to
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happen so cfa institute has done a study
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on this both from a short term and long
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term perspective so let me read that
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part out so it says that the report
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looked at 20 different incidences from
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boston marathon bombing to pearl harbor
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and found that s p 500 fell on an
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average by 1.2 percent on the day of the
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event whenever the war breaks out the
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markets react negatively on the next 22
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days the markets continue to drop
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falling on average by 5 so yes so
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markets do go down no doubt about that
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it took average of 47 days to recover
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those losses including the yom kapoor
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war in 1973 london subway bombing in
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2005 the market recouped its losses in
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just a few days so this is the short
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term play but what about long term
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while war of course terrible and
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destabilizes it it turns out that
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conflicts can bolster portfolios during
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world war ii korean war gulf war u.s
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large cap stocks rose by 16.9 18.7 11.7
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percent outperforming the average large
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cap annual return of 10 in fact due to
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some weird reason the markets go up
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after a war the same situation played
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out in 2014 everyone was expecting when
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russia annexed crimea that the moscow
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stock market is going to fall guess what
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no it went up the markets actually
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celebrated that move now again i am not
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an international relations expert but
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this is what the data tells us this is
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what the research tells us so what is
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the summary of this entire discussion
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number one thing is that there is no
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need to panic because there is a very
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high likelihood that no trade
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restrictions are going to take place
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even the worst case scenario plays out
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that russia ends up getting into a
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full-blown war with ukraine so that is
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point one number two please don't cut
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your positions in the stock market
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please don't engage in panic selling it
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is just not worth it because even if you
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pull out money from the stock market
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there is no better short-term asset
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class where you can place your money
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number three it is good to take little
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bit of position in gold no doubt about
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that similarly you can take little bit
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of positions in bonds also right now
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because the entire world is fighting
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together to curb that inflation menace
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and as the data tells us that as the
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inflation comes down the bond market
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typically ends up doing well so from
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that particular perspective please don't
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engage in rumor based buying and selling
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of that stock i had made a separate
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video on what led to the actual market
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fall so i hope this video helps you
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understand the entire war situation
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between ukraine and russia better and
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accordingly you will be able to
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restructure your portfolio thank you so
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much and i will see you tomorrow
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