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Israel Hamas War: Impact on Indian Stocks

Oct 9, 2023

Israel Hamas War: Impact on Indian Stocks

Geopolitics is often ignored in financial markets.

For reasons best known to them, investors and traders don't think it's as important as other factors that move markets.

The best example of this was the Russia-Ukraine war. Russia's preparations for the war was apparent about a year before the start of hostilities. In fact the writing was on the wall at least a few months before February 2022.

Yet hardly anyone in the financial markets wanted to believe it back then. Up to a few days before the war, people were exchanging memes on social media about how Ukraine hadn't been attacked.

The entire global financial market sentiment changed on 22 February when the war began. It shouldn't have been a shock...but it was. We all remember the carnage that followed in the stock market.

Well, geopolitics is back dominating the financial headlines again. But there is a difference this time.

It wasn't easy to see the Israel Hamas war coming. Everyone knew about the tensions in the region but no one could have anticipated the scale of the hostilities.

Once again both investors and traders will have to reassess the market situation as well as their personal portfolios.

The big questions are how will the war change the macro picture for the Indian markets and which stocks will be badly affected?

Let's dive into the answers...

The first and most obvious impact on the market is the negative sentiment this war will bring with it.

Indian stock markets were expected to fall in a knee-jerk response today...and they already have.

The other macro level impacts will be on crude prices and the US dollar. Crude oil has been rising over the past few months and the war is only going to keep the price higher for longer.

This is bad news for India as a major oil importer. Higher crude oil prices will result in higher input prices and higher fuel prices. This will keep inflation high. Inflation was expected to come down over the next 12 months but will likely remain high in the short term.

The good news is that India has sufficient crude oil reserves to ensure supplies in the short term. This was confirmed by the country's oil minister. However if the war drags on, it will result in higher prices and in a worse case scenario, some amount of supply shortages.

The dollar index is likely to be a beneficiary of this war. The US dollar index has already strengthened from a level just below 100 back in the first week of July to about 107 today. If it strengthens further, the rupee could come under pressure.

A depreciating rupee is bad news for importers but could offer short term relief for exporters.

All in all, this war, no matter how long it lasts or which direction it takes, has once again brought to light the importance of geopolitics for market participants. Ignore it at your own risk.

Now let's look at some Indian companies that could be impacted by this war.

#1 Adani Ports

Adani Ports share price is down about 5% today.

This decline would not have come as a surprise to the market. Adani Ports owns the Haifa port in northern Israel. It completed the purchase in January this year for about US$ 1.03 billion and operates the port with a local partner.

While the war is mainly in the south of the country and Haifa port hasn't been targeted by Hamas, investors are concerned. If there is a wider escalation in the conflict, as many fear, critical infrastructure inside Israel could become targets.

The company has clarified in a statement that the port contributes only a small 3% of its cargo volumes and that they have a business continuity plan for such scenarios.

#2 Sun Pharma

Sun Pharma's subsidiary, Taro, is an Israeli firm.

The latest news from the company is that some of the staff could be called for active duty in the war. This could impact production to an extent.

However, this is unlikely to have a big impact on Sun Parma's overall consolidated financials. The company has said that it doesn't expect a material impact on production due to the war. This is probably why the market is not too concerned about the Sun Pharma share price right now.

However, things could change. It would be prudent to watch the news on the company over the next few days.

#3 Oil Companies

Stocks in the energy sector have taken a hit today and that's understandable. These company's margins will take a hit due to higher oil prices.

This is because being government owned, they won't be able to demand high prices for its products and if they do, there is the strong possibility of a windfall tax being imposed upon them.

These companies, despite having good financials, are caught between a rock and a hard place. They don't benefit from the movement of the price of crude oil. However, their margins, and thus profits, could be impacted in the short term.

#4 PSU Banks

It's not surprising that share prices of PSU banks are down today. The reason is in the war's impact on inflation in India.

These banks have been on a roll this year. The main reasons for this were the improving fundamentals and low interest rates.

If inflation in India remains high due to high crude oil prices, there is a chance the RBI will raise rates. In this scenario, these banks will have to prove that the loans they have given out in the post covid boom were not of a questionable nature.

It the non-performing assets i.e. NPAs of PSU banks continue to decline or at least don't increase, then the market will be reassured. But in the short term, these worries will be a factor influencing these stocks.

#5 Paint Stocks

Whenever crude oil prices go up, the one sector that's always hit badly is the paints sector. That's why paint stocks are down today.

The main inputs in the manufacture of paints are crude oil derivatives. These companies have no control over these input prices. Thus their margins suffer whenever crude oil prices rise.

This is happening again. The market believed the recent rise in brent crude oil prices above US$ 90 per barrel was temporary. That may have been true and crude oil prices had begun to fall.

However, this war has the potential to keep crude oil prices higher for longer, especially if the conflict escalates. This would be really bad news for the paints sector as a whole.

While the long term prospects for these companies are good, investors in these stocks should closely watch the margins and thus the profitability.

Conclusion

Once again the fallout of war is making its presence felt in the market.

The Russia-Ukraine war was initially expected to last at most a few weeks or months. It's been more than a year and a half. There's no sign of any settlement.

The world could without another long war. The best case scenario would be a quick end to this war.

However, investors should be alert to the possibility of a long drawn out conflict...and the implications of the same.

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