Equities In Jitters Amid West Asia Quarrels: Turmoil Concluded Or Unfolding?

The ongoing Israel-Iran conflict has left the global equities in jitters including the Indian stock market. If Israel strikes back in response, the volatility can further intensify in the equity markets which could further derail the plans of interest rate cuts. 

The Indian stock market’s iron dome failed to nullify the Middle Eastern tension which started between Israel and Iran. The benchmark indices, Nifty and Sensex triggered their losing streak and declined more than 1 per cent in the Monday trading session wiping off five lakh crore of of capital, followed by a sharp fall in the Tuesday trading session.

The Iran Retaliation
The enormity of the Iranian action is still sinking in for the global community as it launched 300 projectiles on war-torn Israel. Though it did not cause major damage did not happen, the issue remains a potential escalation point, in a crucial energy supply area for the world. 

“It was a massive action with a non-impact due to the air defence capabilities of Israel and the US. This is a very difficult situation, that is contained for now, for a few hours, days, months hopefully. But the rules of the game changed with this massive attack. As and when this escalates, we will see sharp market reactions,” said Ajay Bagga, Market expert.

Those who are claiming that World War III has started may be right eventually. Those who are claiming it was a non-event, should realise 300 suicide drones+ballistic missiles+cruise missiles were launched, added Bagga. 

Experts Reliance
Few experts believe that it is not a full-fledged war and imposes only short-term disruptions to the market which could further bring buying opportunity. 

“Anything that alters the equilibrium is a risk to the markets. However, it is very short-lived as we saw in the Israel-Gaza war or the Ukraine-Russia war. We see such events as a buying opportunity since the India growth story remains strong and is moving in the right direction at a historically higher pace,” said Mohit Khanna, Fund Manager, Purnartha One Strategy.

However, Sonam Shrivastava, Founder and Fund Manager, Wright Research is apprehensive about the conflict and said, “Iran holds a large chunk of the world's oil reserves and is a major producer. Any disruption to their exports, due to sanctions or conflict, could cause a ripple effect throughout the entire global market. Unlike other potential disruptions, it's not just about a single event or localised issue, and the possibility of broader conflict involving Iran could have far-reaching economic consequences that extend beyond the oil and gas sector.”  

Discretionary consumer durables, travel and tourism can experience significant downturns due to such disruptions. Furthermore, commodity-driven sectors like steel and chemicals can face setbacks due to import reliance and price fluctuations during wartime. Lastly, companies with high debt leverage are particularly susceptible to financial strain in a volatile economic climate, advised Shrivastava. 

Global Volatility
The Middle East crisis could result in a spike in crude oil prices which is a fuel for inflation. India imports two-thirds oil needs from Arab nations, hence any disruption can intensify the inflation domestically as well as globally.

The price of Brent directly affects inflation which in turn impacts central banks' decision on interest rates. Geopolitical disturbances in the Middle East and OPEC+ latest decision to extend the voluntary cuts of 2.2 million bpd into the second quarter of CY2024 are the primary reasons for Brent's recent rally to USD 90 per barrel. We remain watchful as the event unfolds and results in Brent's price volatility in the near term, said Khanna. 

Safe Havens
As the equity market displayed its volatility in trading sessions and pessimism knocking on the door, the retail investors should hedge their investment which can mitigate the impact of such unexpected geo-political tension.   

“During uncertain times, one should look to invest in sectors that remain stable, that are connected to the core of the economy and contribute to the necessities. Sectors such as Healthcare, Telecom, Consumer Staples and Utilities can be looked into. Utilities could be interesting because the government is focusing on enhancing the power infrastructure in a big way,” said Kush Gupta, Director, SKG Investments and Advisory.

While seemingly logical, defence stocks might not be a guaranteed haven, as their performance hinges on specific government contracts and potential wartime involvement, said Shrivastava. 

It is not possible to make money in the markets without being invested in them. But relook at your asset allocation and ensure you can sleep peacefully at night knowing that anytime a 10 to 20 per cent fall can happen in your equity allocation. That is why diversification, having an emergency fund and buying 'safe-haven' assets are important,” commented Bagga.

Corporate Earnings Amid Conflict
As the Indian stock market displayed its strength and made fresh peaks with each session, such quarrels can delay the Central Banks’ plan to cut interest rates. Moreover, as the corporate earnings season begins, the ongoing tension could hinder the stocks’ performance despite the decent results. 

Escalating volatility can undoubtedly dampen the positive impact of strong corporate earnings. Investor risk aversion intensifies, prioritising capital safety over potentially volatile stocks, even those with robust earnings. Broader economic uncertainty arising from the war, encompassing supply chain disruptions, surging energy costs, and dampened growth, further overshadows individual company results, said Shrivastava. 

However, the severity and duration of the escalation will determine the extent of this dampening effect. Companies with sound fundamentals and limited exposure to the war zone might still see their strong earnings rewarded by the market in the long run, highlighted Shrivastava.

“While big geopolitical incidents like these can cause short-term volatility, the mid to long-term outlook on the Indian economy remains intact. Domestic demand, a growing middle class and a stable government provide great support to the markets. In fact, in certain cases, India has come out strong out of international conflicts, by emerging as a lucrative choice of investment, believes Gupta.