Israel-Iran crisis: Avoid knee-jerk reaction, use any correction to deploy cash into equities, say money managers

The Islamic Republic denies ever having had a nuclear weapons program or planning to have one.

The ongoing Israel-Iran conflict has fuelled geopolitical tensions in the Middle-East and beyond, and the embers are unlikely to spare Indian stock markets when trading resumes on October 3.

Nifty has already shed 480 points in the last five trading sessions. The fresh wave of hostilities between Israel and Iran is expected to dent the equity markets further, which means retail investors might have to brace up for a round of volatility in the days to come.

However, focusing on the basics of financial planning and asset allocation could see them through this potentially turbulent phase. “Given the current market valuations, we remain big believers in asset allocation. By diversifying investments across various asset classes, investors can mitigate the risks of overvalued markets and capitalise on opportunities that arise during market corrections,” says S Naren, ED and CIO, ICICI Prudential AMC.

Gold, too, is likely to be in focus in the days ahead. Quantum AMC’s CIO Chirag Mehta believes that investors must have adequate exposure towards gold in times like these. “(allocation to gold should be) about 10-15 percent to adequately diversify the geopolitical risks should they lead to a risk off,” he says.

Avoid knee-jerk reaction during chaos

Escalation seems imminent, with Israel making its intent to retaliate clear. “These are early days, we cannot predict the magnitude of any further escalation. However, there is no need for any knee-jerk reaction. The markets will eventually stabilise over a period of time, as we saw after the breakout of the Russia-Ukraine war,” says Harshad Chetanwala, financial planner and Co-founder, Mywealthgrowth.com.

Market fluctuations are likely to ensue but investors should keep their eye firmly on their goals. “Avoid making impulsive decisions based on short-term market fluctuations and stay focused on the financial goals you have set to achieve for your life and family. Continuing to invest regularly (through SIP) can help mitigate market volatility over time,” says Ravi Kumar TV, Director, Gaining Ground Investment Services.

Also read: As the Middle East conflict spirals, how should investors position themselves?

Continue your SIPs

Ravi Kumar TV points out that the global macroeconomic situation does get affected in times of geopolitical crises. “At present, several other factors, too, are at play – China is reducing interest rates, Japan tried to increase rates, Australia is still in the higher inflation trajectory,” he adds. Investors, should, however, not deviate from their long-term, goal-oriented financial planning strategy.

“There are always different variables playing because of the global macros due to monetary divergence. If you are investing for the long term through the SIP routes, you should continue investing as these events become less relevant when you look back,” he adds.

Use market corrections to deploy cash

Overall, it’s best to keep it simple at the moment. Retail investors with cash in hand looking for the right opportunity to deploy could look to act now. “A lot of retail investors are sitting on the fence, with cash they would like to invest. The equity markets have only moved up since the election results. So any correction in the equity market due to escalation in the Israel-Iran war could present opportunities to deploy cash, but one must invest gradually, not at one go whenever the market consolidates,” says Chetanwala.

Also read: 'Deeply concerned': India reacts as Iran-Israel conflict escalates

Adhere to your financial plan

Notwithstanding the turmoil the conflict will unleash in global markets and your portfolios, it’s best to stick to the basics of financial planning and asset allocation. Investors should avoid panic reaction and ensure they have a diversified multi asset allocation plan in place. “Given the current valuations, it makes sense to rebalance the portfolio and address the skewness in allocation that may have resulted due to rising equity markets. Within equities, the valuations in the mid and small-cap space are significantly higher than large-cap and also as compared to their historical averages. Hence, portfolios should adequately reduce their equity exposure and be more skewed towards large-caps,” says Mehta of Quantum AMC.

By sticking to your original plan, you will be able to give your SIPs the opportunity to harness the power of rupee-cost averaging during market swings. “If you have invested in a sector-specific fund in recent years which may get impacted due to tensions in some countries that affect those sectors, you should review the SIPs in the sector fund and accordingly change their allocation. For example, an emerging market fund may experience volatility due to currency fluctuations, energy price fluctuations, or central bank announcements. While short-term volatility is inevitable, having a long-term view always helps,” adds Ravi Kumar TV.

Gold bound to shine

During turbulent times, gold tends to show its mettle, lending protection to your investment portfolio. Experts say the yellow metal should be seen as an asset allocation avenue and not a return-generating tool. “It always does well in uncertain times and if the war escalates, gold prices will rise. We believe the allocation towards gold in the portfolio should be 5-10 percent. If this share goes up due to a rise in gold prices, you should not sell gold to rebalance. Instead, use any new or unused funds that you may have to buy equities at lower prices,” says Chetanwala.