War clouds rattle Dalal Street

Uncertainty spooks markets more than anything else. Iran’s aggressive fightback against the combined might of the US and Israel has only increased the uncertainty, with the result that the entire Gulf region is in turmoil. While the bombings were carried out on US bases in the Gulf, the spirited fightback unnerved market watchers who were anticipating a quick end to the war. That expectation sprang from reports that Oman had convinced the US and Iran to get back to the negotiating table. It was also based on the earlier war on Iran having lasted for 12 days. The BSE Sensex shed close to 2,000 points in the last two sessions amid the ongoing escalations in the Gulf.

While many experts feel that a crisis is the right time to invest for the long term, the truth is that markets are still unnerved. FPIs have been net sellers and the only factor holding up the markets is the DIIs, who are playing bull to the retreating FPIs. Investors feel that rushing in to buy at these levels would be foolhardy.

They reckon that with the Hormuz Strait being off bounds, India would be more adversely impacted than other Asian countries. One-third to one-half of the total crude comes to India through the Hormuz channel. While spot prices of crude have already gone up to over $75 per barrel (almost 159 litres), a few analysts are already predicting it could go up to $100 per barrel. Secondly, the bombing of a few units of the Ras Tanura refinery, one of the biggest in Saudi Arabia, and the closure of a liquefied petroleum gas plant by QatarEnergy after it was targeted by a few drones, all portend a massive disruption in energy supplies. India buys a substantial portion of LPG from Qatar, Saudi Arabia and the UAE. Lower supplies from this region could have an impact on industries.

While it is true that crude can be brought into India by alternate routes, the higher freight rates of tankers are likely to make it a costly affair. Whether Russia will offer crude to India at the same discounted rates as earlier remains to be seen.

During the Gulf War in Kuwait, also known as the third oil shock, crude oil, which was ruling at around $14 just before the war, nearly doubled when the Patriot missiles were launched. The US, in a bid to curb the sharp rise, initially sold crude in the open

market to contain the runaway increase. The US could even now make a similar move and flood markets with Venezuelan supplies, which could be used by private refineries such as Reliance Industries, which has the capability of refining heavy, high-viscosity oil from those fields. RIL was given a licence by the US to directly import and refine Venezuelan crude.

While investors are optimistic by nature, as they should be, about the future, the current escalation in Iran cannot be ignored. Besides crude, investors are also concerned about the fall in the value of the rupee. While retail investors, unlike FPIs, do not follow risk-on and risk-off strategies, for no other reason than sheer laziness, smart investors will refrain from expanding their exposure at current levels.

Investors are also awaiting more clarity on the objectives behind mounting the attack on Iran. Trump has stated diverse objectives: dismembering the Iranian navy, destroying its ballistic missile capacity, eliminating its capability to make nuclear weapons, and cleaning out its proxy arms which may pose a threat to the US. Does the US want to ensure that Israel becomes the regional uncrowned leader in the Gulf region?

Trump had stated that he would not have US armed forces on the ground to prevent another faux pas such as those witnessed in Afghanistan and earlier in Vietnam. But with Iran refusing to play dead, the US may not be able to achieve all its objectives. From the

look of it, investors feel that it will be a long-drawn war. In such a scenario, instead of buying in a falling market, where the bottom cannot be gauged, the best course for investors would be to wait for the market to stabilise and buy when it is decisively moving upward.

While DIIs have a virtually unlimited supply of funds, retail investors do not have such a luxury. Instead of buying in a hurry,

rationality demands remaining patient. It is better to lose an opportunity in a crisis such as war rather than risk losing capital. For compulsive investors, it would be better to stick to large-cap companies which can possibly benefit from post-war reconstruction activities.