Explained: If Iran-Israel conflict escalates, what happens to India's stocks, oil and gold

Global assets are feeling the early tremors of Iran-Israel conflict, with Middle Eastern equities falling, and gold prices swinging.

Indian and major world equities markets have so far withstood the impact of the geopolitical tensions, but investors are now nervously watching any signs of Iran escalating the conflict in the Middle East. Traders are worried about disruptions to crude oil supplies in the wake of mounting tensions in the Middle East - the world’s largest oil producing region.

“The markets have been digesting earlier conflicts, such as the Israel-Gaza unrest, which had limited economic impact on global supplies. However, Iran entering the conflict can create havoc,” said Kranthi Bathini, Director at WealthMills Securities, adding that investors need to closely track crude oil in the near term.

If Iran further escalates the tensions, especially with the use of deadlier weapons in retaliation, or if the conflict gets out of control with other nations joining in, then it could add to supply worries for crude oil, said Gaurang Shah, Senior Vice President at Geojit Financial Services. This will especially impact those countries dependent on oil imports, such as India and China, Shah added.

Also read | Nifty, Sensex end almost 3 percent lower amid selloff: Benchmark indices fell on 5 August as weak global cues and US recession fears led to broad-based selloff. At close, BSE Sensex was down 2.74 percent at 78,759 and NSE Nifty was down 2.68 percent at 24,055. (Full story)

Crude oil on a downtrend, but an escalating war may stem the fall

Crude oil prices have been in a downturn for the last few days, exacerbated by recession fears gaining momentum in the US, but a worsening Iran-Israel conflict may threaten to limit the fall, or even reverse the trend. Brent crude futures dropped 53 cents, or 0.7 percent, to $76.28 a barrel by 8.19 am GMT on Monday, 5 August. US West Texas Intermediate crude futures were down 57 cents, or 0.6 percent, at $72.95.

Israel and the United States are preparing for a possible escalation in the region after Iran and militias backed by the regime - Hamas and Hezbollah - vowed to retaliate against Israel for the assassinations of a Hamas leader and a senior Hezbollah military commander. “The risk of a wider regional war, while I still think is small, can't be ignored,” said IG International analyst Tony Sycamore in a Reuters report.

Markets feeling early impact of Middle-East conflict

Asset classes are already feeling the tremors, with Middle Eastern equities falling and gold prices swaying. International gold prices dropped sharply but recovered soon on August 5, trading little changed near $2,440 an ounce.

Also read | Jefferies' Chris Wood says India's stocks more resilient amid risk of US downturn

Israeli stocks tumbled the most since October, with the benchmark TA-35 Index down 3.1 percent earlier on August 5, before recovering mildly to end near lowest level since February. The selloff extended Egypt too, with investors dumping assets, reported Bloomberg.

Can Indian stocks, powered with liquidity, cushion the geopolitics?

Nonetheless, market experts say Indian markets are in a stronger position, with robust domestic investments and continued liquidity. “India (market) is in a much better place now than before; we are dealing mostly with imported issues, such as recession in the US, crude prices, and such,” said Gaurang Shah. Indian retail investors are getting mature, he added, referring to robust SIP flow into equities.

Foreign money too is expected to flow into emerging markets in the face of uncertainties in foreign economies, said Gaurang Shah.

Bathini too said that while the global sentiment is weakening, India remains resilient. “India has seen a strong equity culture. There is liquidity, which will cushion Indian markets from global shocks,” he added.

Also read | Markets brace for an off-cycle US Fed rate cut rise as weak US data triggers a global selloff

Though, there could be some flight to safety, towards gold and platinum, said Shah. This could lead to gold prices outperforming equities in the short term, helped by a possible US Fed rate cut, added Bathini.

How could geopolitical tensions shift the balance for emerging markets?

The increased Iran-Israel tension could see investors look even more favourably towards emerging markets, and not just equities. “With over 70 EM countries to invest in, fixed income portfolios are likely to temporarily shift away from one region into others, in times of increased geopolitical stress,” said Simon Quijano-Evans, chief economist at Gemcorp Capital Management, in a Bloomberg report.

“Geopolitics is a risk that re-appears in every corner of EM, at times cross-correlated and at times region-specific,” he added.

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