The Indian stock market has had a somewhat sombre last 18-24 months.
The reasons are varying but the recent tariff rain down globally was the prime point of uncertainty.
Global markets do not take a liking for uncertainty, they prefer to know the state of things no matter how grim the situation.
The middle east has always been a melting point, the recent escalation of events is keeping in tune with the fragility of the region rather than it being an anomaly.
So, where does India figure amidst the ongoing pandemonium when geographically it is distant.
Middle East & India
Even though India is miles away from the middle east, it is heavily dependent on it for one the most crucial and volatile elements, OIL.
India is in a somewhat vulnerable position not just geographically but also geo-politically.
In the past we have attempted to diversify our Oil sources to Venezuela, Iran and Russia instead of being completely dependent on the middle east but for geo political reasons our hands were tied.
Any disruption to our oil import will have ramifications for sure but historically speaking the effects have been short term and not long term.
This is applicable to both the stock markets as well as our overall economy.
A very good example of this is the 1991 oil crisis, we floundered to only flourish later.
Why the middle east matters?
India is not directly related to any ongoing global conflict.
Any conflict where we are directly involved has historically involved our neighbours.
Despite that, any global conflict that threatens our oil supply or the trading routes will have an adverse effect on us.
The Sudan crisis, irrespective of how inhumane in nature has no bearing on us but the Russia – Ukraine conflict does since it disrupts our oil supply.
The question is not about the distance but rather the impact.
OIL
Oil is prominent is almost every sector but more so in trade, since we live in a highly globalized world any impact on trade has a direct impact on prices of goods and services.
All of this can lead to an economic turmoil and inflation in particular.
India still imports more than 80% of its crude oil requirements and therefore making it highly dependent and sensitive to middle east instability.
Equity markets tend to have a short-term negative view overall and in particular to sectors directly affected by it like aviation and chemicals.
The straight of Hormuz accounts for more than 50% of our crude oil imports, any attempt to even partially alter it or close it will impact us.
Globally speaking, it is on the lower side of 20% but it is still a significant number.
The INR question
Any stretch of geo-political stressors usually give impetus to the US dollar and commodity prices.
This should not be viewed as other currencies getting weaker but rather the concurrent global financial system being more favourable to the US dollar.
India does have substantial foreign exchange reserves while the current account deficit is also manageable.
However there is no denying that any disruption to our oil supply does have short term ramifications on the INR.
Why markets are resilient
Equity markets are not immune to disruptions but in the long run they grow despite that.
Such disruptions are viewed as a part of the cycle, a feature and not a bug.
The markets also price in disruptions but not emotions, which is why there could be short term downswings but not long-term repercussions as history has proven.
In India growth is guided and pushed by domestic consumption within which rural consumption has a larger role to play and capital expenditure.
Everything else is viewed via the lens of a temporary guest and not a permanent fixture.
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Market Returns during Disruptive years
Mutual Fund investments are subject to market risks & past returns are not indicator or guarantor of future returns
What should the Investor do
Philosophically speaking, one should neither be burdened by that past nor nervous about the future but rather one should learn from the past to prepare for the future.
Equity investing is no different.
The four most dangerous words in investing are "This time it’s different" – Sir John Templeton.
There will be short term consequences, there’s no sugar coating that but decision making based on such short-term volatility is futile and history is testament to that.
Investors who have sold off during such times have lost out on the recoveries that followed, this is not to say that a recovery is a guarantee but rather that strong fundamentals usually trump short term disruptions.
Invest with a goal and a plan to achieve that goal, diversify and stay away from noise in the form of news channels while sticking with professional advice.
In the end the guy with a high eq, staying the course with a seasoned mentor wins over the high IQ guy trying to reinvent the wheel.
You may be smart but do not make the mistake of trying to prove it to the world, not only are you opening yourself to losing sleep but also your hard earned money.
The ongoing conflict in the middle east is a pressing issue, no question around it but sadly it’s not the first time.
A long term, serious and a seasoned investor is well aware that equity investing is not a linear game so such disruptions unfortunately are a reality of human civilization.
Be it human lives or equity investing, history has warned us enough times to take the judicious approach but if there is one thing that cannot be measured it is human stupidity.
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