Editor || Debarauti Samui
West Asia has once again plunged into a severe conflict as Iran launched a series of missile attacks on Israel on October 1, 2024, in retaliation for the killing of the Hezbollah Chief. This has further escalated the ongoing crisis, prompting major powers like the US and the EU to urgently seek ways to de-escalate the situation.
India’s immediate concern is the impact this would have on oil prices. Last week, the global oil benchmark Brent crude surged by 8% amid fears of a prolonged Iran-Israel conflict.
West Asia accounts for a third of the global oil supply, raising concerns among traders about potential supply shortages if oil facilities are attacked or sea routes are blocked. As the world’s third-largest oil consumer and importer, after China and the U.S., India depends on imports for over 85% of its oil needs, making it particularly vulnerable to fluctuations in oil prices.
The ongoing conflict has caused a surge in global crude prices, with Brent Crude approaching USD 75 per barrel. This increase in oil prices not only raises India’s import costs but also puts pressure on the Indian currency by driving up demand for the dollar.
Sector Overview
Beyond macroeconomic concerns, domestic markets took a significant hit last week after the Iran-Israel attack. The Sensex experienced its steepest drop since June 2022, plunging 3,884 points (4.5%), leading to a wealth erosion of ₹16.3 trillion. Foreign portfolio investors (FPIs) added to the turmoil, offloading ₹15,243 crore worth of shares on 3 October, followed by another ₹9,897 crore the next day—setting a record for the largest single-day sell-off.
Despite this, India’s retail inflation has stayed below the 6% threshold since September 2023, within the RBI’s 2-6% target range. Core inflation, which excludes volatile food and energy prices, remains stable, comprising nearly half of the consumer price index basket. However, any surge in overall inflation may further delay the much-anticipated rate cut from the Reserve Bank of India, dampening market optimism.
Certain sectors like Tyre and paint manufacturers, FMCG, carbon black, lubricant makers, and speciality chemical firms, are all heavily dependent on crude oil derivatives and will take a hit due to the expected rise in price.
On the other hand, IT services and tech stocks, including companies like TCS and Infosys, as well as pharmaceuticals like Sun Pharma and Cipla, are seen as safe bets due to their resilience against geopolitical events. Additionally, the defence sector, particularly companies exporting to Israel, is expected to perform well, though its current high valuations after a strong rally should be taken into consideration. Despite the danger of overvaluation, the defence remains an attractive opportunity for long-term investors.
A Closer Look Within
The real risk for Indian markets, however, lies not in the West Asia conflict but in the growing disconnect between market sentiment and stock fundamentals. Despite the ongoing geopolitical tensions since 2022, Indian markets have remained resilient. However, with current market overvaluations, a prolonged correction is becoming increasingly likely.
Additionally, the recent surge in Chinese stocks, spurred by government measures to boost the economy, presents a potential trigger for foreign portfolio investment (FPI) outflows from India, as China offers more attractive valuations.
Conclusion
While domestic inflows remain strong, it is imperative that as investors we act with prudence and not complacency as bull market corrections tend to be short but sharp. While staying informed about shifting geopolitical dynamics and their effect on investments is important, the key to long-term outperformance lies in focusing on resilient businesses with strong financials, solid growth potential, and high returns on invested capital.
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