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Illustration: Binay Sinha
The Indian stock market could experience a decline early this week due to the potential for higher oil prices and increased investor risk aversion amid the ongoing conflict between Iran and Israel.
A war between the two nations has the potential to disrupt oil supplies in the Middle East, a major oil-producing region. Experts believe any escalation between the two nations may lead to a rise in crude oil prices, which in turn will push inflation upwards.
The war could lead to a significant increase in oil prices. When oil prices rise, it can hurt investor sentiment across emerging markets like India. This is because higher oil prices can lead to inflation and slower economic growth. As a result of these concerns, investors are expected to become cautious and may move their money out of riskier assets like Indian stocks and into safer options like gold (bullion).
Geopolitical tensions escalated in the Middle East after Iran launched more than 300 drones and missiles against military targets in Israel on Saturday night in response to a suspected Israel attack on Iran’s Syria consulate on April 1. Iran’s Islamic Revolution Guard Corps (IRGC) confirmed the attack, saying it was ‘aimed at specific targets’. Meanwhile, Israel is likely to strike at Iran in retaliation.
“If this remains a “we’re done now” rather than escalating , focus will be back on corporate earnings and the US Fed outlook . If Israel further escalates or Iran does another round of attacks, the markets will be in Risk Off mode. Precious metals and safe haven currencies as well as crude oil will go up while risk assets will see a sell off, “ said Ajay Bagga, a market expert, on platform X.
Indian stocks were already under pressure due to the US Federal Reserve not cutting interest rates as much as initially expected.
Potential for Sell-Off: If the conflict escalates, investors might sell riskier assets like Indian stocks and move their money to safer options.
Impact on Gold Prices: Gold prices jumped by more than Rs 1,000 to Rs 72,931 per 10 gram on Friday, largely driven by escalating geopolitical tensions. This geopolitical uncertainty has fuelled a rush into safe-haven assets, propelling gold prices up by 1.60%.
Gold as a Safe Haven: Gold is often seen as a safe investment during uncertain times. The conflict could lead to an increase in gold prices.
Potential Volatility: Gold prices could become volatile, potentially swinging significantly.
Investor Caution: Experts recommend caution when investing in gold, as prices are already high and might not necessarily keep rising.
“Indian equities could see temporary short-term headwinds from the US Fed easing being pushed into CY25 and hardening commodity prices due to adverse geopolitics. Fed rates have minimal impact as the India story is largely internally driven with a capex turnaround and a recovery in domestic manufacturing. A large and sustained commodity price rally is a more material risk, but that looks unlikely for now,” said Seshadri Sen, Head Of Research And Strategist, Emkay Global Financial Services.
What should investors do?
“The escalation of conflict and seizure of cargo ship by Iran may increase volatility in the global equity markets including India. The world will watch the response by Israel and the G7. Further escalation in the conflict may lead to a hike in crude oil prices and in turn push inflation upwards. This reduces the chances of rate cut and in turn valuations of stocks, including Indian equities, especially at a time when they are not trading cheap,” said Shrey Jain, Founder and CEO SAS Online, India’s Deep Discount Broker.
“Indian exporters may see an increase in costs be it tariffs or time to delivery. This should hamper the margins and the market participants should discount the same quickly by selling such counters. Stocks of oil marketing companies too should be watched out for. Sustained high crude oil prices, lower margins and inability to pass on higher prices ahead of elections, should act against OMCs. Investors may prefer domestic power sector stocks and pharmaceutical stocks as defensive plays in a volatile phase of the market. Select large cap capital goods, defence and infrastructure stocks can be bought at lower levels. Traders should strictly follow stop loss in their open positions,’ added Jain.
Knee-jerk reactions can lead to poor investment decisions
Focus on long-term investment goals and avoid making hasty changes to your portfolio based on short-term events, said experts.Assess your portfolio’s risk tolerance. If you’re risk-averse, consider rebalancing your portfolio to include a higher allocation of safer assets like bonds or defensive stocks.
” If the market goes down due to an external factor outside its control but the fundamentals are still strong, it is time to use the dip to buy your favourite stocks at a good price, but please do not panic sell,” said Ali Azhar, CA and NISM Registered RA.
If you’re invested in equities, consider focusing on well-established companies with strong fundamentals that can weather market volatility.
“Valuation excesses are stark in the mid and small cap buckets, driven by hopes on continued strong corporate earnings growth and a stable policy environment. Large inflows in mid and small caps have also contributed towards this re-rating. We find better relative value in the large cap category and the strong (high growth + high quality) mid and small cap companies, and believe that they still present an attractive opportunity for long-term investors. Limited triggers to boost valuations further necessitates the focus squarely on capability of the companies to grow cash flows and earnings, and reinvest the same. The select group of companies that can deliver on that count may continue to benefit from the broader macro and demographic tailwinds, said Vinay Paharia,CIO,PGIM India Mutual Fund.
Gold might be a hedge against inflation caused by rising oil prices. However, be cautious as gold prices are already high and could be volatile. Consider a small allocation if it aligns with your risk profile.
