In a report titled ‘When the World Feels Dangerous: Why Your Portfolio Shouldn’t Panic’, WhiteOak Capital Mutual Fund said that the panic in the markets during every crisis is driven by the illusion of “this time is different”. It explained how every geopolitical crisis feels uniquely terrifying for the investor living through it, making the urge to do something overwhelming.
“But here’s what the data shows: geopolitical crises are terrible for headline-hugging investors, and largely irrelevant to long-term investment returns,” it added, citing data on how markets reacted after every major crisis.
How markets reacted during previous crises
During the 1998 Russian debt crisis, the Sensex fell 10% but recovered within six months. Investors who stayed invested earned 15% annually over the next five years. After the 9/11 attacks in 2001, which saw two hijacked aircraft flying into the Twin Towers in New York, global markets crashed amid fears of extended conflict, terrorism and economic collapse. Back on Dalal Street, Nifty fell 17% in two days. However, it was back to pre-attack levels by December 2001.
The 2008 Mumbai terror attacks pushed Sensex, which was already weak from the global financial crisis, to as low as 8,500. The benchmark index was back above 21,000 by 2010. The Indo-Pak tensions following the Uri attack and Balakot airstrike in 2016 and 2019, respectively, also made markets volatile for some time. However, in a short period of time, nobody remembered that there was a dip at all.
The beginning of the COVID-19 crisis in 2020 pushed markets down 32% from March to April, but they recovered within 4 months. The onset of the Russia-Ukraine war in 2022, which echoed a crisis akin to the next World War, saw energy prices skyrocket. Nifty fell from 18,000 to 15,200 (16% drop). But by September 2024, Nifty crossed 25,000.
Do you see a pattern?
“Notice the pattern? Every crisis felt existential while we were living through it but ended up being a speed breaker on an eventual cruise control for the markets,” WhiteOak Capital Mutual Fund said, adding that the things that markets care most about are corporate earnings, interest rates, and valuations. Geopolitical events rarely change these fundamentals permanently.
The fund house explained that geopolitical shocks like the current war in the Middle East are almost always sentiment shocks. These are, however, different from a structural economic collapse like the one in 2008 that actually changed fundamentals: banking systems froze, credit dried up, and companies couldn’t borrow or function normally. Such crises take years to recover because the damage is structural, not just sentiment-driven.
Geopolitical shocks on the other hand creates “fear, volatility, dramatic headlines, and portend doom”, but rarely break the underlying economic machinery, it said, adding that the correct response to such developments is “not repositioning your portfolio but it’s to stay disciplined to your strategic allocation and riding through the volatility”.
“Investors who, based on emotions, sell during geopolitical shocks underperform those who stay patient and disciplined. Not because they’re bad at picking investments, but because they exit at the wrong moment, stay on the sidelines, and then re-enter near the top, or never re-enter at all,” the fund house said.
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It explained with an example of an investor who sold everything in March 2020 at the onset of the Covid-19 pandemic. “By the time it felt safe enough to reinvest in January 2021, Nifty was at 14,000. An 84% rally from the low in 2020 missed because of waiting for certainty or clarity that never arrived,” it added.
Geopolitical crises are gift opportunities
“Here’s the counterintuitive truth: geopolitical crises are gift opportunities for disciplined investors. When crisis hits and markets fall, your equity allocation automatically drops as a percentage of your portfolio. Your debt and gold, being more stable, now represent a larger portion. If you have a target allocation, say 60% equity, 30% debt, 10% gold, and equity falls such that it’s now only 52% of your portfolio, your discipline says: restore balance (rebalance) by buying equity. This forces you to buy low. Not because you’re smart or brave, but because you’re systematic. The rebalancing approach forces you to be greedy when others are fearful. Not through courage, but through commitment to a pre-set system,” the fund house said.
How should you actually handle a geopolitical crisis
WhiteOak Capital laid out a framework for how investors should handle geopolitical volatility. Before any crisis, they should set their system well – define target allocation based on goals, rebalance bands and commit to the system in writing when markets are calm – “During crises, I will rebalance to target allocation, not sell in panic”.
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During the crisis, the investors need to then execute the system – instead of reacting aggressively to the latest news, they should rebalance systematically and not try to predict how the crisis will unfold. After the crisis, they should evaluate the system and not the outcome. “Geopolitical volatility isn’t the exception. It’s the background noise of successful long-term investing,” it concluded.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)