In the tenth edition of our podcast Insider Investing, we talk about the Russian invasion of Ukraine, and its implications on the economy & our portfolios. Our Co-Founders Vaibhav Porwal & Sandeep Jethwani discuss the origins of this conflict, the impact and how investors should react at times like this.
Tune in to learn what could be the near term economic impact & potential market impact of this crisis, and how similar events had played out in the past. We also talk about what investors need to keep in mind while investing their money in this environment of turmoil, and how to build a robust long term portfolio on the back of diversified asset allocation and quality.
0:00 - Episode Introduction
0:40 - What's happening
3:14 - Rise in Autocratic culture
4:04 - Echo Chambers
5:12 - Human Impact
7:26 - Near term economic impact
10:05 - Impact on Inflation
13:03 - Jump in Market Volatility
18:51 - What should Investors do
22:58 - Need for Expert Advice
26:13 - Closing thoughts
Sandeep: So today is 24th of February, 2022, and a big and interesting day. A lot of events have come to head till yesterday. We were hearing about Russia hacking into, or doing a cyber attack on Ukraine. And today we finally see Russian troops invading Ukraine. While a lot of this has been in the works for some time, this is truly a very interesting event in geopolitical history. I think many years later, we will talk about the day when actually Russia invaded a neighboring country. Now, everyone has a different perspective on this. Russia's perspective is obvious, or at least the stated objective is that they are helping a part of Ukraine become independent. They want to go independent and Russia has just helped it. Ukraine's point of view is obviously that these are separatists and this part is integral to Ukraine. And the Western world's view is that this is Russia's act to prevent NATO from expanding and threatening the geopolitical security of that region. This is something that I realized only recently is that on one hand we have Putin whom we all have. Has been in power now for 23 years, he's a previous KGB spy. So, I obviously understand how to play this game really well. And on the other hand, we have Zelensky, who is the Ukrainian president. Who's actually a former comedian and this is his first term in power? He's been around for three years. So not only does Putin have an upper hand in terms of Power and money, et cetera. But in terms of experience and real depth, potentially Putin is much, much stronger.
Sandeep: Hi Vaibhav, welcome back to insider investing. You are also returning this time from Kashmir and, what have we come back to?
Vaibhav: Yeah, absolutely. Hi, happy to be back Sunday and similar feelings. So as you said, everyone has a narrative, even for Kashmir. Everyone has a narrative, Pakistan wants to say that they are helping the is, a part of Kashmiris believe that they need independence. And India believes that it's an integral part. Obviously we would want to be with India on this narrative, but every, every country will have its own narrative. And these are absolutely interesting times. One thing which I realized, and I've been studying about it is after world war two. The autocratic culture of running a country has dissipated significantly, but over the last seven to 10 years, again, it is starting to rise. You have Putin in Russia, you have Erdoğan in Turkey, and you have Kim in North Korea. So, people believe that autocratic culture will come back and they will solve all their problems. And somehow it is very similar to how it played out in Germany of world WWII, where everyone believed that democracy had failed the country and they needed a powerful leader to maybe get them through the crisis. So that's, that's where we are.
Sandeep: Yeah. It's interesting. I think some of it is also being fanned by social media. Right. I, we saw earlier this week, Trump launched Truth - Social, and, you know, Truth and Trump in the same sentence is interesting to have, it's oxymoronic. But, what is, what seems to be happening is that even within countries, one part of the polity or country is not talking anymore to the other part. Everyone is in their own echo chambers. And some of it is also, I think, in how social media is created, right? If I follow a set of people, Social media will recommend to me content from that set of people or those types of people. So that bubble only gets hardened and hardened. And before you know it, you're not listening to the other side at all.
Vaibhav:That amplification of you is constantly happening because you're listening to the same voice again and again. And that's, that's the problem because that's how algos work to keep you engaged. They want you to listen to the same thing that you want to engage in. Absolutely.
Sandeep: And you know, for me, the obvious worrying point is that from sitting here in India, in Mumbai, we are comfortable, we are in our air conditioned rooms, but on the other hand on the ground, there are real, real people who will suffer in this conflict and for us while, and we'll discuss the economic impact, the impact on markets, on our portfolios. And so on in the next 15, 20 minutes, What is really going to be worrying is the human impact of this. The US believes that at least 50,000 people will die in case of war if full-fledged war does break out and who knows what long-term implications that has on the life of people. We saw it in, and the post-World war II era, especially in the aftermath of the nuclear,bombings on, on Hiroshima Nagasaki. Those generations took a long time to come back from that. So that for me is the real concern and this worry and story of this conflict.
Vaibhav: No, absolutely. And I believe, and I hope that, all of us have learned our lessons from Hiroshima and Nagasaki and any kind of nuclear war will not happen. Again, all the countries with their nuclear weapons have created data. And so , more in terms of ensuring that other countries don't attend.
Sandeep: Yeah, you know, for me, and this is an important part that links mutually assured destruction. Is one, aspect of geopolitics, which is probably possibly holding wars back, and if you see the concept of NATO, NATO was built on the concept that if any of NATO members is attacked, it is an attack on all the NATO members, which means that theoretically, they also have to jump into action. Now, as of now, Ukraine is not a member of NATO. Theoretically NATO is not going to be pressed into action automatically, but , if the war crisis spreads to the Western parts of Ukraine and then into adjacent countries of Ukraine, which are NATO members, it can be quite a worrying and potentially then it could be a full-scale war, but let's move to what we think is the near term issues or the problems that this can cause, especially explain to our listeners about the impact on energy prices,
Vaibhav: Energy prices. So Sandeep, India largely depends on Middle Eastern countries and Russia for energy supplies, almost 30 to 40% of our energy supply comes from Russia in case there's any disruption in that supply, energy prices will go through the roof. We already saw a crude crossing, a hundred dollars per barrel in the morning. So that pressure sustains along with that other elements of inflation are also there. And all of that can be significantly negative for the markets short term. Where some of these are a short-term mission in nature. And once the normalcy will resume prices will also normalize. So investors need to be careful. On the war, my thesis is I believe that it will remain localized and I hope that it will remain. Last 20 to 30 years, you've seen a lot of localized wars. We've seen Israel & Palestine continue for some time. You've seen all the wars in Middle Eastern countries and in India & Pakistan had its own share of regional conflicts and China and India. So if, as long as it remains localized, I don't see too much of a risk, but the issue is, and as you highlighted NATO coming into the picture and then them being obligated to react to what Russia is doing that can create a full-blown war. If we go back in history and look at world war one and world war two, it also happened because there were treaties and every country reacted to or responded to those treaty obligations. I hope that it doesn't play out like that this time.
Sandeep: No. Absolutely. I think that is something that we are already seeing early signs of, of the oil crisis or the energy crisis playing out, India for the benefit of our users or listeners, imports 80%of all of its energy supply, which means that it puts a pressure on the current account deficit. Current account deficit is a net outflow of currency from India. And which means that potentially it can cause some pressure on the rupee. Interestingly enough, we still don't see the rupee weakening dramatically. What, however, potentially can be an immediate impact is the impact on inflation. Given how much energy contributes to our wholesale price, index. It is possible that inflation may continue to rear its head. And we've spoken about this very, very recently on Insider investing. If you think about it, January inflation prior to this oil price, going up the WPI and correcting me if I'm wrong, wherever it was around 13%,
Vaibhav: It's been in double-digit for quite some time now. Yeah. And which means that if in February andMarch, oil prices increase further, there's a potential of inflation reaching the mid teens, also. Yeah, no, absolutely. And it will spill over to the consumer price index also and therefore consumer inflation with. Go up energy, , and contribute directly also. And indirectly also, even in the food prices, because transportation costs go up, food prices will also go up and that impacts households much more than any other use of energy. Yeah.
Sandeep: It's a confusing time for central bankers, especially in India also. We saw a strange thing and we looked at the monetary policy of last week. There was no change. The RBI continues to maintain a stance which is befuddling a lot of economists. So, because that can cause serious impact on the currency and potentially, and to explain again, to our listeners, if Indian interest rates remain lower and the global interest rates are higher, money will settle into where the interest rate is higher, which means that there's potentially a withdrawal of dollars that can have. Which is something that RBI has not reacted to just yet. We do think this inflationary shock can push RBI into acting, or will they think about this as a short-term thing again?
Vaibhav: So I think they are taking a view. That most of the inflation is because of supply constraint, not because of demand push. And with that narrative, they are sitting on the sidelines and hoping that eventually inflation will normalize once the supplies resume. But with this, I think the RBI will be pushed in the corner and will have to act. So you saw a similar kind of narrative from the Fed also for the longest, longest time where they said that inflation is transitory only in the month of November, they admitted that, it's, it's becoming structured now. and, I'm assuming the RBI will also come to the same conclusion.
Sandeep: So Yeah, we're talking about a time when potentially inflation will rise. Interest rates can also rise.if not already, we already see it in the bond markets where, at least on the corporate bond side , interest rates are increasing. We'll talk about how attractive corporate bonds are becoming right now, but coming to the market specifically, one of the data points that we know market analysts track is this concept of VIX. As it's called the volatility index, which is an indicator of a potential sort of significant up and down in the market. And most likely it's down, India's VIX jumped 30% to almost 31 this morning, the US VIX is also, what do you think is, is likely to be the near term impact of these events in equity markets?
Vaibhav: So jumping in the VIX is a nightmare for the traders. So I'll explain it to our users. The last 18 to 20 years, volatility of the market has been extremely low and all the traders have gone short on volatility. That means they work with an assumption that volatility will keep going down and it has gone down significantly. And they've benefited because of that. If volatility goes up, these traders will be forced to unwind the position.and if they are forced to unwind the position, your correction will get amplified because of their action. And, it will over stretch into a territory which seems unanticipated this month. So increase any kind of increase in volatility. It's not great for short-term traders. However, for long-term investors, volatility is great. You get a great opportunity to buy a stock, set the prices at which. You want to buy, obviously you need to have some sort of expert assistance in deciding which ones to buy the other thing, just to build on the same point on interest rates. So what we are seeing Sandeep. It's very interesting, looking at the data. Yesterday evening, the nifty corrected by six, six and a half percent from the peak. From the highs of 18,500, we are down to 17100 to 17200 So it's a 6.5% to 7% condition. Some of the high, multiple stocks or stocks where profitability is not, have corrected by 40, 50, 60%. So that's where the big distinction will have to be made by investors and then interest rate in the environment, which is extremely, extremely benign. These stocks can perform well, because you can live with higher multiples, but the moment interest starts going up, multiples have to compress and which is what we are seeing playing out in the market. So investors need to be careful about what kind of portfolio construction they do.
Sandeep: I think we'll talk more specifically about parts of the market there, I agree. And you had mentioned this even on our last podcast, that especially in the current times when interest rates are rising, there are certain stocks which are highly overvalued. These are stocks where cash flows coming much later, or profitability is coming much later, investors were tolerating. Given that the interest rate was low today. Today tolerance for that has gone down dramatically. And I think that's potentially an opportunity. The other thing is this whole question of, is this potentially going to be a regional issue or it's going to be widespread globally. If it was a regional issue, then we'd potentially argue that this being a buying opportunity, if it's a widespread global issue, then is there something to be worried about and then , not make investments at the current point.
Vaibhav: Only time can tell about it, Sandeep. Honestly, sitting where we are today. I would advise all our investors to go slow on investing in stagger their investments, at least, wait for next, a couple of months and over a couple of months, period. Gradually keep investing your positions in the market. Yeah, it's, it's difficult because there's so many moving parts in it. As I said, if NATO gets involved, then it can convert into a full-blown war which is not healthy for the markets. , you know, the interesting thing is that a large part of this is, was already in the news, right? Yeah. It didn't happen suddenly. And if you look at sudden events, like I would think 9/11 was a sudden event. , it was not something that we were expecting to happen, , in such a dramatic fashion, even then the time to recover. Of the markets,I was reading earlier today about 31 days and the Fed really kicked into action again at that point in time. So do you think that if a full-blown crisis happens , then the central banks again, will kick into action to prevent a huge, , hit to the global economy and therefore to stocks, they don't have any room. We are almost at zero interest rates, right? That's interesting, so they don't have any room. Unlike previous crises, where they had significant room this time around, they don't have any room. Inflation is getting out of hand and if they intervene more, it will get further out of hand. And which impacts the currency in a significant way.
Sandeep: I don't think they will go very aggressive on that and hope that there is more of a short-term crisis which will play out over the next 30 to 40 days. Yeah. Yeah. I think that's something to watch out for. I think that's a great point that unlike the previous crisis, and we love saying this time it's different, but , unlike the previous crisis, the issue this time is that the central banks have very limited room to pump liquidity into the markets, which then brings me to what should investors really do at a time like this? And one thing which we have been consistently talking about is focusing on quality, you know, and you and I do this every Sunday where we speak to a lot of our new onboarding members who are coming on the platform. One of the things that started worrying me, especially this whole thing about margin trading for the last year. Even people who have full-time other day jobs have ventured into margin. And then there's this whole multibagger stock-picking thing that is going on. You know, I look at Twitter and the clickbaits are that, , find out more about Rakesh Junjunwala’s next multibagger stock. And that to me is extremely worrying. So how should investors think if they have positions like those at the current time?
Vaibhav: Honestly, if you're in those kinds of positions, unwind and migrate to safety. So I will tell you three interesting points,
Point number 1, which you asked me about investing. We have been recommending all our investors to have some allocation, to real assets gold, be it a realist. And I had this interaction with one of the analysts last week, and he said, why are you recommending gold? It has not done anything for the last three, four years. So my response to him was that I have not been investing for the last 3, 4 years. I'm investing for the coming three, four years. So, I can look at investing from a rear view mirror and say that because there's an asset class performing well, I should invest more or because there's an asset class that didn’t perform well, I should not invest money. So that's point number one, all the investors need to remember that they are going to invest for the future. Not for their past
Point number 2, in terms of the traps,an interesting trap, which I saw, and I've been observing it from the sidelines as the stock called Tata Tele Maharashtra services limited, the stock price went up from 10 rupees to 300 rupees, right. In a span of two years. So that's almost 30 times. It has been corrected by 60%. Now it's down to 120 rupees. The unfortunate part is investors invest only after it has seen significant relief because they believe that it will continue to go up and most of the money or capital allocation happens, so let's say in this case it would have happened at 150 and then 200, 250 people per piece, right? Because your belief is so strong that stock is going to go up only. And when the downturn starts, you don't have any. Because stock hits the bottom cycle pretty much on an everyday basis. So stay away from these kinds of beds. In the short term, it looks really glamorous that your portfolio has grown by 5% on a daily basis.but it can, it can not cause significant damage to your network. And we saw it time. And again, we've seen it playing out in 2006, seven, where a bunch of real estate stocks would go up five, 10% on a daily basis and enlist as well. Happy about it, but eventually it ends up losing 90 to 95% of its value. So that's point number two.
Point number 3, in terms of asset allocation, choose your asset allocation wisely. Don't ignore all the asset classes , have some allocation to all the asset classes. There is a lot of merit in this old wisdom that diversifies your Portfolio.
And the last last point is to use some expert help. You'll need a lot of emotional support. Also people who have seen cycles will be able to guide you much better in this environment versus someone who has not seen the cycle. We spoke about a lot of these new investors who have started investing for the last couple of years. They are not seeing any downturn for them. It is important that they take some assistance, use some expert assistance, which will help. We'll never get through this crisis.
Sandeep: No, I think this is an important point and you know, which is why simple investments like mutual funds are hugely underrated. Think about like on one hand, if for the majority of your portfolio, you have experts taking care of it. and experts are two levels, right? One is asset allocation experts, people like us. And then there are fund managers who are looking at it on a day-to-day basis at this point. Where would you rather as an investor have your money, right? Would you rather have it in your hands where we are doing day jobs full-time and have to pick stocks at the same time. We're handling projects, which we have to deliver, or, you know, in a day or two. And on the other hand, we have to keep looking at our portfolio. That's just not viable. Right. So if we have two levels of expertise, one is at the asset allocation level and the other at the fund manager level. Why would you not want to have that at the current times?
Vaibhav: Absolutely. I strongly recommend it. Both of us have been there in the market for more than 17, 18 years. And most of my money is there in mutual funds, despite being very close to the market. And maybe because I'm very close to the market, I know that I need some expert advice in managing my money. Correct. Absolutely. And I think that is something that comes across very clearly in times like this, our own money is not being managed in direct stock. So. I think that's a great point to make. And lastly, I think what I do genuinely believe is that long-term thinking is a superpower. It's not easy. It's very easy to get drawn into. Near-term upsides, having conversations with people in parties and people will come and tell you that, okay. I bought this Stock and did so well. And then you want to chase that, but what really is a strong ability of long-term investors to ignore the noise and stick through asset allocation. Simple things are actually hugely underrated. And I think that's when people really make capital,over a period of time.
Vaibhav: Yeah, absolutely. You have to choose between the two either you can get excitement or you can get a return, so you can't get both. Yeah. And then, today there's not, we're not getting the right kind of excitement. So , you alluded to gold and fixed income.
Sandeep: I know you have them in the integrated portfolios. , talk more about how you think about that as well as what is happening in the corporate bond space and why potentially there are opportunities piping up there. No interesting times on these. So if you, if you remember a post 2008 crisis, even a bank like SDLC was raising money at 11 and a half, 12%. So similar kinds of opportunities are available in fixed income. So where the gap between, , equity returns and fixed income returns narrows significantly. So I strongly recommend that we should look at some of these opportunities today and park some money where you can generate good 10, 10.5, 11% returns without any volatility. And, our team is working on bringing some ideas around that. So hopefully we'll share some of that with our users. great, well, thank you so much. , we just hope this crisis stays contained. People are safe. I think that is more important. At least for now money will be made and lost in the markets.
We just hope that the situation remains safe and everyone comes out of this. It was an interesting session and we hope to do this again very soon. Thanks.