Countries and their economies are interconnected in terms of their dependence on each other for trade, services, investments, etc. Hence a big geopolitical event in one part of the world will have a sentimental impact initially on markets in other countries.
Indian equity markets plunged around 3% on Thursday as geopolitical tension escalated after Russian president Putin announced a military operation in Ukraine early Thursday. Following this, explosions were reported in several areas of Ukraine and air sirens went off in Kyiv, indicating that the capital city is under attack. Markets across Asia plunged and oil prices surged after Russian military action in Ukraine. A massive sell-off that started in Asian markets spilled over to India and other indices. Benchmark indices in Tokyo and South Korea fell 2% and Hong Kong and Sydney lost more than 3%. India’s Volatility index surged past 30 per cent to a 20-month high. Oil prices also jumped to over $100 per barrel on unease about possible disruption of Russian supplies. But why does an overseas conflict between two other countries drag Indian share markets down?
Why do global markets take a hit due to geopolitical tensions?
The world is but one global village
Deepak Jasani, Head of Retail Research, HDFC Securities: “Geopolitical events involving large nations and at crucial geography could impact the movement of goods, disrupt supply chains, resulting in anticipatory hoarding which could lead to commodity price rise. This could impact the inflation rates and hence the currency rates of nations. Such events may also impact the risk appetite of global investors resulting in selling pressure in assets. Countries and their economies are interconnected in terms of their dependence on each other for trade, services, investments, etc. Hence a big geopolitical event in one part of the world will have a sentimental impact initially on markets in other countries while the actual impact will be known only later.”
Disruption in fund flows from developed to emerging markets
Neeraj Chadawar, Head, Quantitative Equity Research, Axis Securities: “Macroeconomic factors across the world drive trade, finance, currency. These factors also drive the fund flow which moves from developed markets to emerging markets or say Asia-Pacific markets. Macroeconomics are the key factors having a bearing on the equity markets. Along with that, macroeconomics also has a bearing on all the major asset classes including equity, debt. gold, currency. Geopolitical tensions have a direct, indirect impact on macroeconomic factors as they can disrupt supply chains, trade channels, movement of goods and services.”
Equity is volatile, is always the first one to get hit
Neeraj Chadawar: “A geopolitical event always comes up with a short-term reaction in the market because the news flow headline across-the-board leads to market volatility, the gauging factor which decides the sentiment of the market. Since equity is always considered as a volatile and highly risky asset class as compared to debt, gold and currency. So the reaction to geopolitical tensions in the equity market is always higher compared to other asset classes.” Chadawar added. He went on to explain how the recent developments in Ukraine has caused volatility across the world to spike. In domestic markets, India VIX rose to 32 mark and that is a short-term negative factor which leads to short-term underperformance of riskier assets like equity.
How will Ukraine-Russia geopolitical tensions impact India?
Naveen Kulkarni, Chief Investment Officer, Axis Securities: “Geopolitical events often come up with short-term reactions in the market as the dominant news flow leads to market volatility. The current Russia-Ukraine crisis would lead to a rise in oil prices, higher than the current levels. High crude prices could delay the cool-off in inflation, which was expected to go moderate by the second half of 2022. We believe the present macroeconomic developments are leading to volatility in all major asset classes, including equity and debt. The volatility is here to stay for some time before we conclude a market direction.”
India’s import bill may shoot up
Neeraj Chadawar: “Though India imports less than one per cent of its crude from Russia as Indian refineries are unable to process the heavy crude that Russia produces, it will indirectly face the brunt of higher crude prices and its import bill will shoot up immensely which would impact the already high CPI inflation leading to an increase in food, as well as, commodity prices.” Brent crude price on Thursday shot past $104 a barrel in the international markets for the first time since 2014 due to recent Russia-Ukraine development. If Western nations impose sanctions on Russia, the crude prices will surge further as it is one of the top three oil producers in the world, fulfilling 12 to 13% of the global oil demand.
