Stock Exchanges | Storm on the bourses

Markets hate uncertainty, not war, they say. But when war is raging, markets do not remain immune to its blows. It was no different for the Indian bourses, with the BSE Sensex falling 11.6 per cent—from 82,249 points to 72,696— between February 28, when the US and Israel declared war on Iran, and March 23, when President Donald Trump announced a five-day withholding of strikes. Meanwhile, surging oil prices and major foreign portfolio investor (FPI) outflows saw Rs 48.29 lakh crore, or nearly 10.4 per cent of total investor wealth, disappear in the fog of war. The market capitalisation of BSE-listed companies came down from Rs 463 lakh crore to Rs 415 lakh crore in this period.

Markets took their sharpest dip on March 23 as Trump’s earlier 48-hour ultimatum to Iran to open the Strait of Hormuz began to run out. Iran said it would respond in kind, targeting energy facilities in the GCC (Gulf Cooperation Council) region. The sabre-rattling took a 1,836-point, or 2.46 per cent, toll on the Sensex, while the Nifty 50 fell 602 points or 2.6 per cent. Later in the day, Trump instructed the US military to postpone any strike on Iranian energy infrastructure by five days, which drove up market sentiment by 1,372 points on March 24. Brent crude prices, too, fell 6 per cent to $106 a barrel on March 23 after Trump’s announcement. The situation should improve further as Iran conveyed to the UN that it would allow non-hostile ships through the Strait of Hormuz.

The aviation, banking, energy, manufacturing and consumer goods, and infrastructure and capital goods sectors saw the most selling pressure. Aviation was impacted both by high ATF (aviation turbine fuel) prices as well as disruptions from the ongoing war. Oil marketing companies like BPCL, HPCL and Indian Oil Corporation felt the strain since they could not pass on the full impact of high crude prices to consumers. Besides the Rs 2 per litre hike in premium petrol prices and Rs 22 a litre on industrial diesel, the Centre kept retail fuel prices untouched. Heavily import-dependent sectors such as paints, chemicals and cement were affected as well. Capital goods companies like Larsen & Toubro saw their large manufacturing facilities suffer because of natural gas shortage.

Several analysts are comparing the tumult on the bourses to the situation during the early days of Covid-19, when lakhs of crores of investor wealth was wiped away. “This is a perfect storm for India,” says Nilesh Shah, MD & CEO of Kotak Mahindra Asset Management Company. “There are over nine million Indians in the Middle East, and their safety is definitely a concern. Their tens of billions of remittances are needed to maintain India’s balance of payments. Moreover, the supply of oil from the Middle East and its price have been a major challenge.” Corporates impacted by high input costs and shortage of natural gas supplies will see their earnings affected. Meanwhile, higher inflation, an outcome of the war, will keep interest rates under pressure.

Such steep correction was recorded on two occasions in the past decade, says a research note from Nomura—during the Covid-19 pandemic in 2020 and at the start of the Russia-Ukraine war in 2022. “The market valuations in terms of price to earnings or spread over bond yields are at the low end of the valuation band prevailing over the past four years. An additional 5 per cent correction (like the one during the Russia-Ukraine war) is a distinct possibility in the near term, with small- and mid-cap stocks at relatively greater risk.” Such a correction should present a buying opportunity from a long-term perspective, Nomura added.

COPING WITH VOLATILITY

The Indian bourses have been highly volatile so far this year. “Investors will have to wait for the storm to end,” says Shah. “We may not sink. We have $700 billion of forex reserves. We have built strategic oil reserves. Our boat will toss in the storm, but not sink.” He believes the markets will bottom out before the end of war. India has been there before: during the Kargil and Gulf wars. The opening of the Hormuz Strait should help stabilise oil prices, even though it will be months for the cargo stranded at various ports to clear. The global economy will then start to recover. His advice to retail investors? Keep invested in large and medium-cap stocks; avoid aggression.