Abstract

Objective
A. Introduction
"You get recessions, you have stock market declines. If you don't understand that's going to
happen, then you're not ready, you won't do well in the markets." — Peter Lynch
Financial markets have been reacting to the increasing geopolitical situation and subsequent
policy reactions, such as sanctions imposed on Russia, since late February 2022. The
invasion's immediate impact was a dramatic increase in commodity prices as well as severe
equity price declines, primarily affecting Russian markets. Beyond the Russian market,
corporate and sovereign credit market dynamics have deteriorated significantly, especially in
several developing markets in Europe and Asia. Russian banks have been subjected to
extremely stressful conditions, owing in part to the disconnect of some Russian banks from
the SWIFT international payments system. Spill overs have also impacted international
banks, particularly European banks with significant Russian exposure.
Geopolitical uncertainty, rising commodity prices, sanctions, and regional business
disruptions have all contributed to increased uncertainty and risk aversion.
B. Literature Review
This section presents a high-level introduction to the function of technical analysis in
introducing the current economic situation followed by a rudimentary introduction to discuss
the challenges faced by the financial markets and investors due to the aforesaid conditions.
Though the author presents an economic outlook to the conditions, he/she is mostly focused
on the issues arising in the financial markets. Thus, the study presents diverse potential risks
arising out of a war and a pandemic and proposes an investors/firms/companies/markets
reaction to the same.
C. Data and Methodology
To meet the primary research objectives, the article relies on qualitative and quantitative
sources for data collection, with a focus on theoretical approaches supported by the most
recent figures and statistics. Secondary data sources included authentic journals, articles,
magazines, newspapers, and websites obtained via the Internet. Established facts, statistical
data, and reports were also examined. Data from official international journals such as JP
Morgan, BBC, and findings by The Times of India, World Economic Forum, and
International Monetary Funds are among the sources (IMF).
 D. Analysis
The current economics situation has rattled the global financial markets and thrown them to
severe turmoil. Global financial conditions, along with geopolitical situations, remain highly
uncertain and risky. Analysing the economic and financial situation can help us deal with
risks and issues to a greater degree.
Recession Fears
Recession can be defined as a sustained, prolonged and significant period lasting for a few
months, when economic activity falls and unemployment rises. In general, recession is
defined as two consecutive quarters of negative GDP growth. The recent IMF Economic
Outlook gauged that the eurozone will expand by 3.1% this year but just by 0.3% in 2023.
Due to its heavy reliance on gas imports from Russia, Europe has been one of the most hard-
hit advanced economies by the intensification of geo-political tensions between Russia and
Ukraine. As per OECD’s Economic Outlook Interim Report, The European area is going to
suffer a major economic output decline in economies like Germany and Italy. The US
Economy has witnessed a fall for two consecutive quarters- 1.6% during the first quarter of
this year and 0.6% the next quarter. The Chinese Economy has witnessed a downfall of 3.2%
in 2022 from a massive 8.1% in 2021 caused by market shutdowns and “on-off” lockdowns.
Talking about the emerging markets and the developing economies, they seem to have
performed pretty well as compared to advanced economies, although a brief period of growth
decline is visible. (India: 6.8 in 2022; 6.1 in 2023, Sub-Saharan Africa: 3.6 in 2022; 3.7% in
2023)
The World output is projected to fall by 3.2% in 2022 to 4.4% in 2023.
The abrupt slowdown of growth is caused by rising energy prices due to Russia-Ukraine
conflict, less favourable financial market conditions and post pandemic supply-chain
disruptions.
Surging Inflation
Inflation can be described as the increase in the general price level of goods and services
leading to a reduction in the purchasing power parity (PPP) of an individual.
Although inflation rates had been higher than the central banks’ target even before the
Russia-Ukraine crisis (such as in India, in 2021, the central bank target inflation rate was
4.00% +/-2.0% and the actual inflation was 5.13%). The double effect of post-pandemic
supply chain disruption and the Russia-Ukraine conflict has resulted in a sharp rise in the
commodity prices especially food and energy. The Consumer Price Index (CPI), a measure of
economy-wide inflation, rose by 0.4 percent from September 2022 to October 2022 and was
up 7.7 percent from October 2021.
The current levels of inflation portray a similar image to the inflation rates last seen in 1970s.
The sudden rise in demand side couldn't be met by the supply-side disruptions in the post
pandemic period. This caused the general price level of commodities to rise. The central bank
increases interest rates to curb inflation. This balloons borrowing costs and people spend less
to save more. The Bonds markets suffer ramifications of this policy.
The rise in inflation rate have had an adverse effect on the fixed income investments. Fixed
Income Investment is type of investment which pays the investors fixed interests- the so-
called ‘coupons’ until the date of maturity. This type of investment prevents the investors’
savings from market risks. A secure stream of income, dependable and timely dividend
payments is a reason why fixed income debt security are a preferable form of asset.
But these types of investments are highly vulnerable to inflation and interest rate risks.
Interest rate risk describes the risk of investment losses as interest rates rise. It is most
noticeable when investing in bonds, because bond prices typically fall as interest rates
increase. Because bonds pay a fixed percentage rate, existing bonds must stay competitive
with relatively new bonds that will be issued at greater rates as interest rates rise. To do so,
the cost of the older bond must fall, which is the risk of retaining bonds as interest rates rise.
When the central bank rises the interest rates to tackle inflation, bond prices fall and vice-
versa. These changes in bond prices get reflected in the form of fall in price of fixed income
investments due to the fact that the new fixed-income assets with higher rate are more
lucrative than the existing fixed income assets with comparatively less interest rate. Also,
high inflation erodes purchasing power of the returns received in the future.
Currency Troubles
Many world currency markets have suffered a major blow in last 5 years. The year 2022 has
been dubbed "the worst year in the history of the euro" by analysts. However, over the past
20 years, the euro's significance has been waning. At the end of 2021, it had a 20.6%
proportion of the world's official foreign exchange reserves, declined from almost 25% in
2003.
The currency euro is currently trading at its lowest level since December 2002 after losing
16% of its value against the dollar over the past year. The value of the euro is currently 20%
below its average level since 1999. However, the growing interest rate differentials are not
the only cause of the euro's slide against the dollar. The macroeconomic foundations of the
Eurozone have been significantly impacted negatively by the crisis between Russia and
Ukraine, which has weighed on external accounts and consumer confidence.
Consumer confidence in the Eurozone has never been lower. The trade deficit is at an all-time
high, the Purchasing Managers Indices (PMIs) for both manufacturing and services activity
have already managed to enter contraction territory in July, and the ZEW Indicator of
Economic Sentiment, a sentiment indicator derived from the monthly ZEW Financial Market
Survey, is at its lowest level since the banking collapse of 2011.
Another significant factor that contributed to the euro's decline below parity with the dollars
throughout the summer was Europe's skyrocketing natural gas prices. In particular, the Dutch
TTF, a wholesale gas benchmark for Europe, is presently eight times more expensive than
domestic natural gas pricing in the US, placing European businesses and consumers at a
significant competitive disadvantage.
We see an interesting pattern in the global financial and stock markets after depreciation of
currencies. Most people connect economic misery with currency devaluation. You might see
the financial markets in green when there are news of the currency weakening, even though
this is only partially accurate.
Fascinated? Let's examine this.
Companies that import goods like food, drinks, and oil & gas suffer the most from currency
devaluation. This occurs as import prices rise as the currency's value declines versus the US
dollar. Thus, businesses that import raw materials, capital-intensive industries, and
international borrowings will be most negatively impacted. This will result in a sharp decline
in the market value of these companies' stocks.
However, since selling goods becomes profitable, businesses that depend on exports (as was
described above) will profit the most from the currency's depreciation.
The IT and pharmaceutical industries will therefore drive the stock market's upward trend.
Also, it is important to remember that devaluation can impact market sentiment because it
discourages foreign investment. Foreign investors frequently sell their holdings when the
rupee begins to decline, which can have a negative impact on the stock market.
Volatile Times
Volatility is the rate at which an asset's price moves. A greater level of volatility suggests
larger movements and broader changes in an asset's value. Volatility is a non-directional
value—a greater volatility asset has an equal chance of making a bigger move higher as it
does down, which means it has a greater impact on portfolio value. Some investors enjoy
volatility, whereas others try to keep it to a minimum. In either case, an extreme volatility
instrument carries a higher risk of loss in a down market than a low volatility asset.
Following Russia's invasion of Ukraine, stock values are still low in several regions.
The Indian Picture
The Contagion Effect: It's not the first time that a global crisis has had an impact on
investments. Remember what happened in 2021 when our trade balance was hampered by the
Afghanistan crisis? Of course, with the Covid-19 situation squeezing our stock market in
March 2020. Furthermore, the markets had previously plummeted in 2018, during a trade war
between the United States and China.
The moral of the story is that the crisis is contagious, and our markets cannot remain
unaffected.
The typical investor's reaction would be to wire money home. This could result in some fund
withdrawals and some selling pressure. The risk premium rises in the interim, lowering
equity valuations. In matters of the wallet or the retirement account, it is a basic human
tendency to prefer 'flight' over 'fight.' However, blind investor panic can be a blunder that
benefits long-term and fundamental investors.
The World

Germany's and Italy's heavy dependence on Russia caused their stock markets to perform
among the worst in the world. Those in close proximity to the conflict, such as Poland and
Hungary, were also affected. Equities were hammered. Bonds of country with greater gas as
well as wheat import bills were also hit hard.
Because of its massive domestic economy and ability to meet its energy needs without
importing, the United States is better insulated from the effects of the Ukraine war than
Europe is. However, because financial markets are globalised, US investors may face more
volatility in the months ahead, even if the US avoids recession while Europe does not. The
European Union's economy is larger than that of the United States, and many publicly traded
companies in the United States rely heavily on European consumers for a significant portion
of their earnings. If those consumers spend less because they are afraid of losing their jobs
during a recession, company earnings and stock prices in US investors' portfolios may fall as
well.
Significant flows have occurred from corporate bond investment funds to sovereign bond
investment funds, as well as from growth equity funds to value equity funds. These changes
have not been systemically disruptive thus far, but the sector remains exposed due to its low
liquidity, elevated duration risk, and increased exposure to bonds issued by insufficient
corporates. Way over time in derivatives or investments in crypto-assets pose additional risks
for some funds.
Elevated Indebtedness
Downside risks stem from high sovereign debt levels and increased refinancing needs in the
face of rising inflation pressures and a less loose monetary policy interest rate environment,
with supplementary challenges posed by Russia's invasion of Ukraine.
High sovereign debt amounts and high refinancing needs may boost refinancing risk for
sovereign issuers in the face of rising interest rates, as well as the possibility of extended
fiscal support to mitigate the effects of Russia's invasion of Ukraine. OECD government
market lending appeared to be higher than pre-pandemic levels, but is beginning to level off.
The gross borrowed money of OECD governments, which increased by 70% in 2020 as a
result of COVID-19, is beginning to level off as markets retrieve and disease outbreak fiscal
support is phased out. Despite this, the negative impact on the global economy and inflation
caused by Russia's invasion of Ukraine may necessitate extended fiscal assistance to the most
vulnerable communities and viable corporations to help offset rising prices. As a result of
major central banks tightening monetary policy to control inflation, sovereign issuers may
face higher refinancing necessities at a higher cost.

E. Findings
The major findings of the paper are as follows:
(i) Risks associated with the low economic output and geopolitical tensions can have
serious implications on investor behaviour which in turn can adversely affect the
currency, stock, bonds and financial market.
(ii) Investors tend to switch to secure streams of income under crisis. Risk Aversion
behaviour and panic can be witnessed in such times.
(iii) Credit quality deterioration, downgrades, and defaults would result from increased
corporate debt, coupled with weakening financial outlook and rising mortgage
refinance costs amid higher interest rates, resulting in significant losses for
financial intermediaries.
(iv) Rising systemic risks to financial sector resilience as corporate debt levels rise and
refinancing risk is aggravated by Russia's attack on Ukraine.

F. Conclusion
The analysis presented above makes it clear that the financial cost of pandemic and wars is
market risks and uncertain returns. While sizeable, these costs do not appear to be large
enough to derail the global recovery. However, the future of the war is highly uncertain, and
unforeseen developments in the conflict could generate further changes to geopolitical risk
and worsen its economic effects.