Moneycontrol Pro Panorama | Are equity markets getting immune to geopolitical shocks?

Market reaction to global tensions might not follow the old script.

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After opening in the red on Thursday, Indian equity markets tumbled in reaction to escalating conflicts in the Middle East. At the time of writing, the BSE Sensex tanked 1,300 points, with all sectoral indices trading in the red, even as the India Volatility Index (VIX) surged, reflecting the nervousness on the Street.

Iran firing hundreds of missiles into Israel has sparked fears of a broader war in the Middle East. At this point though, the bigger worry is the manner and magnitude of retaliation by Israel whose power and might has been challenged. In this article, MCPro’s Neha Dave writes what could be the worst- case scenario for India and the world. So far, crude oil prices are holding at about $74 per barrel. Countering fears of further fall is the weak global demand for oil, thanks to the faltering Chinese economy and the high inventory levels in the US.

But the potential flashpoint is any attempt to blockade the Strait of Hormuz. "A little over 20 million b/d (barrels a day) of oil flows through the Strait, with shipments from key producers such as Saudi Arabia, Iraq, Iran, the UAE, Kuwait, and Qatar,” says Dave. This could then lead to a spiral in oil prices, which could dampen investor sentiment in financial markets.

Today’s edition has another interesting perspective on oil and equity markets, put forth by my colleague Shishir Asthana in this article. Citing historical examples particularly that of the recent Russia-Ukraine war, which has lasted over 950 days, the article points out that wars have led to short-term dips, after which they often rebound sharply. In end-February 2023, the Nifty 50 fell by about 5 percent soon after news of the Russia-Ukraine conflict broke out. But from March 2023, in spite of the Middle East conflict continuing, the Nifty 50 has returned investors a handsome 45 percent till date.

Importantly, the role of Gulf capital with respect to US policies and to the world economy has changed. In this article, The shifting sands of the Middle East, Manas Chakravarty writes that from being viewed as a mere oil exporter, the region’s capital is now being invested across the world, from buying up football teams in the UK to the world’s largest technology fund. “These huge investments underpin the links of these countries with global capital and with Israel and the US,” he says.

Perhaps, the recent stimulus efforts in China to fire economic growth and market expectations that more such stimulus measures may follow, are helping global equity sentiment stay positive.

In fact, indices across the markets seem to be supported, mirroring either complacency to geopolitical risks, a sense of calm and confidence in global economic growth, or a vote of confidence that central banks will rush to the rescue whenever needed. Katie Martin, in this FT article, points out that the market reaction to global tensions might not follow the old script. Besides, the consensus among central banks to rein in inflation and support economic growth has helped smoothen the global flow of dollars in moments of distress and will help dull the impact of shocks.

So, the temporary sell-off seen today in Indian equities may well be a blip. Investors’ focus may shift from the Middle East conflict to the September quarter corporate earnings season that is round the corner.

Investing insights from our research team

Sustained rural recovery, pricing good news for FMCG growth

Two-wheelers, exports drive auto numbers in September

What else are we reading?

Iran’s economic woes and its Russia relationship are factors in the search of peace

SEBI F&O curbs deal a blow to market’s stakeholders

Know your MPC: What the three new members bring to the table

Chart of the Day | Need to reduce India’s high logistics costs

India’s pharma sector and regulators have both failed consumers

Assets and risks grow apace in the NBFC space

Is nuclear energy the zero-carbon answer to powering AI? (republished from the FT)

Ukraine’s Victory Plan: Much ado about nothing

The US stock market is becoming a dumping ground

China’s stimulus is good, but Beijing still faces a hard slog

Tech and Startups

Sachin Bansal's Navi Finserv posts mixed FY24 results amid big gains from subsidiary sale

Technical Picks: Dr Lal PathLabs, Jubilant Ingrevia, Jindal Steel & Power, ICICI Bank.

Vatsala KamatMoneycontrol Pro