Israel-Palestine conflict could have severe impact if prolonged; be conservative until clarity emerges, suggest experts

Israel-Palestine conflict: As anticipated, the domestic equity market opened in negative territory on Monday, October 9, amid geopolitical tensions. The conflict between Israel and Palestine during the weekend unnerved global markets and saw crude oil futures prices jump 5 per cent in early trade.

The S&P BSE Sensex slipped as much as 561 points, or 0.85 per cent, to 65,434.61 levels, while the broader Nifty50 index of the NSE tumbled 173 points, or 0.88 per cent. India VIX, the volatility index, zoomed nearly 10 per cent to 11.29 levels.

Moreover, all sectoral indices were trading deep in the red.

The Israel-Hamas conflict has introduced huge uncertainty for the markets. Nobody knows how this war is going to evolve. From a market perspective, it is important to understand that even though the death and destruction are tragic, they are unlikely to cause major disruptions in oil supplies, thereby impacting major oil importers like India. But the situation will change if Iran, a major Hamas supporter, is drawn into the war. That can disrupt oil supplies, causing a spike in crude, which can trigger a risk-off in the market, said Dr V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

Ajay Bodke, an independent market analyst, opines that if the conflict were to prolong and draw in more actors in the evolving geopolitical and geostrategic conflict, like Iran, other Gulf nations, and even Egypt, it is crucial to keep a watch on whether Iran uses its proxies.

"Say, if Iran is blamed and attacked, then it has enough proxies in the Middle East to disrupt the oil infrastructure of its rivals. So, oil prices need to be closely watched to see whether the supply continues at the same pace or gets disrupted. For a country like India that imports 85 per cent of its annual oil consumption, it is all the more important. It can have severe repercussions on macroeconomic fundamentals, imported inflation, and the fiscal deficit," Bodke added.

Another aspect that needs close watch is the much-anticipated and discussed international transhipment corridor between India, the Middle East, Israel, and Europe, which was planned and signed during the recently concluded G20 summit, assuming lasting peace between Israel and its Arab neighbours. Now, one of the clear motivations for launching these incursions by Hamas was to make it almost impossible for Saudi Arabia to break bread with Israel, and it will also create problems for those Arab countries that already have normalised relations with Israel. Back home, many logistics, construction, and railway stocks shot up after the announcement of this pact. So, the market needs to reconcile that this project will get massively delayed, if not disrupted, Bodke said further.

InCred Equities, in its report dated October 8, said that an attack on Iran by Israel or vice versa may lead to disruption of trade in the Strait of Hormuz. Almost 35 per cent of the global LNG trade and almost 21 per cent of the global oil passes through this narrow strip of sea. Also, rising exports from Iran were responsible for the extra tanker requirement. To some extent, Iran was balancing the crude market. If Iran is attacked, then crude flow can stop, the report added. 

It further said that the Strait of Hormuz is a passway for Saudi crude as well, so blocking it will not be easy for Iran without taking the wrath of Saudi Arabia.

"It will be a catch-22 for Saudi Arabia, though; if they attack Iran, then they will be seen siding with Israel. So, most likely, backdoor conversations will lead to the avoidance of this Armageddon scenario," the report said.

What should investors do?

Experts suggest that this is a time to be cautious and hence, investors should refrain from taking big risks. Long-term investors, they advise, can slowly accumulate high-quality stocks on declines.

Ajay Bodke said, "Investors should not be adventurous given the present scenario and should be conservative until there is some perspective about the longevity and spread of this conflict."

InCred Equities has suggested selling OMCs and buying electronics manufacturing services (EMS) companies like Cyient DML, as, according to it, Israel will spend more on defence and Cyient DLM is a direct supplier to multiple Israeli defence companies.