The tragic developments in West Asia have ushered in uncertainty and volatility in equity markets. The death and destruction from the Israel-Gaza conflict are tragic. The consequences of this unfortunate conflict are difficult to foresee now. From the market perspective, the damage has been limited, so far. If the war remains localized as an Israel-Gaza conflict, the markets are unlikely to be impacted seriously. But if the conflict widens and the major oil producer Iran, too, is drawn into the conflict, crude will spike sharply impacting equity markets, globally. The tight monetary policy being pursued by the leading central banks of the world, to rein in inflation, too will be affected if crude spikes sharply, triggered by the spread of the conflict. The impact can be disproportionate on major oil importers. This is only a probability, most likely a low probability event. Nevertheless, investors must be cautious.
From the market perspective, economic headwinds and tailwinds are more significant in shaping the direction of the market. Very few geopolitical developments have impacted the market significantly over an extended period. One geopolitical development which produced lasting impact was the 1973 Yom Kippur war which led to the First Oil Shock that triggered global inflation of the 1970s. Central banks of the world had to pursue tight monetary policy to rein in inflation and this pushed the developed world into stagflation. Globally, stock markets were impacted significantly.
The major crashes in the market in recent times were triggered by economic issues. The market crash of 2000 – the tech bubble burst – was severe and it pushed the global economy into recession. The 2008 market crash was triggered by the Global Financial Crisis. The recent 2020 market crash was triggered by the lockdowns triggered by the pandemic Covid-19. The underlying reason behind all these major crashes has been economic, not geopolitics. Geopolitical issues usually get resolved without causing major market damage. The Russian invasion of Ukraine in 2022 triggered a minor correction, after which markets quickly recovered.
The lesson from this history is that investors should keep calm and remain invested and continue with systematic investment. There are opportunities arising from market weakness and FPI outflows. FPIs sold in September and continue to sell in October. This is a normal response to the rising US bond yields. On October 19th the US 10-year bond yield touched 5 percent. When the risk-free asset class in the world yields 5 percent, it is normal for FPIs to pull out some money. And, when they sell, they sell from the segment in which they have the largest AUM, which is the banking segment. This depresses the prices of high-quality banking stocks making them attractive for domestic investors. It is important to understand that the banking sector is fundamentally sound and is doing well. DIIs are exploiting this opportunity by buying these fairly-priced blue chips. Retail investors too should utilize this opportunity, which will pay handsome reward in the medium to long run.
Geopolitical headwinds usually pass without major market impact
The tragic developments in West Asia have ushered in uncertainty and volatility in equity markets. The death and destruction from the Israel-Gaza conflict are tragic. The consequences of this unfortunate conflict are difficult to foresee now. From the market perspective, the damage has been limited, so far. If the war remains localized as an Israel-Gaza conflict, the markets are unlikely to be impacted seriously. But if the conflict widens and the major oil producer Iran, too, is drawn into the conflict, crude will spike sharply impacting equity markets, globally. The tight monetary policy being pursued by the leading central banks of the world, to rein in inflation, too will be affected if crude spikes sharply, triggered by the spread of the conflict. The impact can be disproportionate on major oil importers. This is only a probability, most likely a low probability event. Nevertheless, investors must be cautious.
From the market perspective, economic headwinds and tailwinds are more significant in shaping the direction of the market. Very few geopolitical developments have impacted the market significantly over an extended period. One geopolitical development which produced lasting impact was the 1973 Yom Kippur war which led to the First Oil Shock that triggered global inflation of the 1970s. Central banks of the world had to pursue tight monetary policy to rein in inflation and this pushed the developed world into stagflation. Globally, stock markets were impacted significantly.
The major crashes in the market in recent times were triggered by economic issues. The market crash of 2000 – the tech bubble burst – was severe and it pushed the global economy into recession. The 2008 market crash was triggered by the Global Financial Crisis. The recent 2020 market crash was triggered by the lockdowns triggered by the pandemic Covid-19. The underlying reason behind all these major crashes has been economic, not geopolitics. Geopolitical issues usually get resolved without causing major market damage. The Russian invasion of Ukraine in 2022 triggered a minor correction, after which markets quickly recovered.
The lesson from this history is that investors should keep calm and remain invested and continue with systematic investment. There are opportunities arising from market weakness and FPI outflows. FPIs sold in September and continue to sell in October. This is a normal response to the rising US bond yields. On October 19th the US 10-year bond yield touched 5 percent. When the risk-free asset class in the world yields 5 percent, it is normal for FPIs to pull out some money. And, when they sell, they sell from the segment in which they have the largest AUM, which is the banking segment. This depresses the prices of high-quality banking stocks making them attractive for domestic investors. It is important to understand that the banking sector is fundamentally sound and is doing well. DIIs are exploiting this opportunity by buying these fairly-priced blue chips. Retail investors too should utilize this opportunity, which will pay handsome reward in the medium to long run.
