The war in West Asia has triggered serious economic consequences for most economies. For oil importers like India, the fear is that the war-triggered oil shock will have serious economic consequences if the war gets prolonged and crude prices remain at elevated levels for long. Brent crude which was trading at around $70 before the war, jumped to $118 on 19th March – a spike of more than 60 percent in 20 days. LPG and LNG prices also soared. India imports around 85 percent of its oil, 60 percent of its LPG and 50 percent of its LNG requirements. It is important to note that this oil shock is not just a price shock, but a supply shock, too. Significant part of our energy imports come through the Hormuz Strait: 50 percent of crude, 85 percent of LPG and 55 percent of LNG. Disruption of the supply chains have impacted the availability of LPG and LNG. Shortage of LPG has impacted hotel and restaurant businesses and supply constraints in LNG are impacting industries using LNG.
If the war prolongs and crude prices remain elevated for long, it will push many economies into recession. No one knows how long the war will last. If the war ends soon, the impact will be small, if not the impact can be big. If the war continues for another month to the end of April and crude prices further rise and remain at high levels, the consequences can be bad: Inflation will rise, interest rates will have to be revised upwards and growth will be impacted. Everything depends on how long the war lasts. This uncertainty and fears associated with the potential consequences are impacting the market. However, it is important to understand that a prolonged war is in no one’s interests.
In the early days of the war, even though markets had turned weak, there was no big crash. The big crash of 3.3 percent happened on 19th March when Brent crude spiked to $118. As on 23rd March, Nifty is down 13.9 percent YTD and 10.6 percent since the war began deep cuts caused by war-triggered oil shock. Before the war the ‘Anthropic shock’ had impacted Indian IT sector pulling the IT index down by about 20 percent.
Meanwhile, the FIIs continue to sell in India aggravating the market crash. The volume and intensity of selling has increased after the war began. This has contributed significantly to the sharp correction in the Indian market. IT and financials bore the brunt of the selling. Widening current account deficit and sustained FII selling have weakened the rupee to Rs 93.60 to the dollar on 23rd March.
From the investors’ perspective, the relevant question is, what to do during this time of crisis. Market history and experience gives us clear guidelines on what investors should do. Let me summarize the appropriate investor strategy in a few points.
- Geopolitical crises caused by conflicts have only temporary impact on markets.
- Don’t panic and get out of the market. Markets have an uncanny ability to surprise.
- Don’t stop SIPs. History has proved that stopping SIPs during crises is wrong investment policy. Investors stopping SIPs will lose the benefits from rupee cost averaging. Don’t commit this mistake.
- Long-term investors can use market weakness to slowly accumulate high quality stocks available at fair valuations. In the cover story there are insights into HALO stocks.
These are challenging times, but history teaches us that short-term challenges are long-term opportunities.
