MC EXCLUSIVE Markets used to one-way rallies, wait on the sidelines amid Middle East tensions: Rajesh Bhatia, ITI

Rajesh Bhatia of ITI Mutual Fund

• Markets may fall over 10% if Middle East tensions persist
• Investors advised to wait, as supply and inflation risks rise
• High oil prices may affect India's current account and inflation.

Did our AI summary help?

The markets could see a fall of over 10% but if the tensions in the Middle East resolve sooner, the market may swing back quickly, said Rajesh Bhatia, CIO at ITI Mutual Fund. However, Bhatia cautioned that there is little indication the conflict will end quickly. Therefore, he believes investors should wait on the sidelines.

If the tensions stretch on for even a few weeks, he warned, the world could face significant supply disruptions and renewed inflationary pressures. In his view, markets have underestimated the fragility within the global financial system for years. He pointed to areas such as private credit, private equity and rising sovereign debt levels as pockets of vulnerability that could amplify stress during a macro shock.

According to Bhatia, global markets have grown accustomed to an environment where equities largely move upward, supported by easy liquidity and aggressive central bank balance sheet expansion. But that cushion may now be fading. “The belief that equities only go up has pushed expectations extremely high,” he said, adding that prolonged geopolitical stress could challenge those assumptions.

"When the markets go down, everything goes down. ONGC or pharma may see some benefits, but largely, everything will fall. I don't think you're going to make too much money, so this is not a correction an investor should be buying into," he noted.

"We are sitting on net long of 20 to 25 percent in our long short strategies. We may even go to zero to completely be risk-off. The only thing that stops us from doing that, and we maintain net exposure of 20 percent is because if the war ends soon, markets could swing back and we will end up underperforming," Bhatia added.

India's macros are great," he said, "We are fundamentally strong. Our banking is cleaner than ever before." Still, he noted valuations remain "slightly higher" than long-term averages, especially in mid- and small-caps due to passive money flows. "Foreign interest in our markets is certainly a little lower," he said, as India sits out AI and commodity rallies.

His main concern: prolonged high oil at $100-120 could create macro pressure. "Large corrections in Indian equity markets always happen when there is a macro imbalance. If this war is prolonged, it does impact our current account by a very large margin. Definitely the balance of payments, definitely the rupee, definitely the fiscal, definitely inflation."

He advised waiting a bit. "Think a little more patiently before putting in fresh money. We are still at a slightly elevated level, so be a little more patient." Buying decisions should focus on absolute value in correcting sectors like real estate, EMS, and specialty chemicals: "Has this come to a valuation that makes sense for me to make an absolute decision?"

Also Read | Markets could see up to 10% fall on Middle East tensions, time to deploy money: Vikas Khemani

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.