Out of the blue, Russian President Valdimir Putin rolled his troops into the Ukrainian territory of Crimea over the weekend.
Crimea is strategic to Russia because of its geographical position in the Black Sea. The Naval base of Sevastopol is its only warm water naval base and is crucial to Russia maintaining its superiority in the region. February saw former Ukrainian President Viktor Yanukovych, someone deemed backed by the Russian establishment, being ousted and replaced by a neutral acting head of state, bringing Putin’s influence to a somewhat premature end.
There were also rumours that Ukraine was about to award exploration rights to energy giant Exxon Mobil after natural gas was discovered just off the coast of Romania. And with the Winter Games in Sochi drawing to a close, Putin must be thinking that there is no better time than now.
The invasion spooked markets and sent investors into a frenzy.
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Asian markets are first hit when they opened on Monday. Overnight in the US, the benchmark volatility index VIX spiked 15% indicating that investors are predicting topsy turvy market conditions ahead. The Moscow Index closed down 10.8% as the country tethers on the brink of a war. Closer to home, the STI closed down slightly below 1%, while F&B manufacturer Food Empire closed down 12% because of its exposure to the region.
While the situation has somewhat abated with Putin ordering troops back to base, it is still very early days yet as we await to see how the situation unfolds.
The optimist would forecast a peaceful resolution, with either Russia pulling out or Crimea accepting the Russian presence. It might also result in an extended but isolated conflict between Russia and Ukraine with everyone else watching on the sidelines. The possibility of an all out war whereby the US and EU finds themselves involved also cannot be ruled out. The havoc that this scenario would wreck on the global stock market would be frightening.
Rather than trying to predict what might or might not happen, the question traders and investors should really be asking now is – Are we prepared for the war?
Are you prepared and able to purchase alternative asset classes such as bonds and commodities to flatten out the volatility in your portfolio? Would you consider implementing the Permanent Portfolio?
If the market tanks, are you prepared to hold on to your stocks even if they were to decrease up to 50% in value?
When the market recovers, do you have a systematic approach to identify undervalued stocks that will outperform the market?
And finally in a hypothetical sense, as traders and investors, are you prepared to do battle with a market that constantly catches you off guard, challenges your emotions, forces you to learn and relearn, drains your energy but at the end of the day reward you handsomely if you are able to persevere?
Traders and Investors, let us pray for peace but prepare for war.