The ongoing conflict between Israel and Iran has introduced new uncertainties in global markets, and Indian investors are feeling the potential repercussions. Experts say that despite these stresses, Indian markets have shown resilience.
“Despite the Israel-Iran crisis and FIIs selling shares worth around Rs 4,300 crore in the last month, domestic institutional investors have supported the Indian markets, investing over Rs 5,000 crore. Mutual funds continue to attract strong SIP flows, which hit a record high of Rs 15,200 crore last month,” said Chetan Shenoy, Director and Head of Product and Research, Anand Rathi Wealth Limited. He added: “This shows that investors are focusing on long-term goals, ignoring short-term geopolitical disruptions.”
Crude oil and India’s dependence on Middle Eastern imports
A prolonged conflict could severely impact Middle East crude oil supplies, which account for about 45% of India’s oil imports. Analysts believe any disruption could lead to a spike in crude oil prices.
“If this conflict escalates, oil prices may rise dramatically. Currently, Brent crude oil is trading at around $94 per barrel. A rise in prices could lead to an increase in fuel costs in India, affecting sectors such as transportation and manufacturing. This may put downward pressure on equity mutual funds, especially those with large exposure to these sectors,” said Mayank Prakash, Regional Head, North India, Epsilon Money Group.
Gold’s appeal as a safe haven increases
Geopolitical tensions often drive investors towards gold, a traditional safe haven asset. In India, sovereign gold bonds (SGB) are gaining traction as gold prices approach all-time highs, currently trading at around $2,050 an ounce.
“Gold prices are likely to rise as central banks around the world increase their reserves. Lower interest rates in the United States are making gold more attractive compared to fixed income assets. SGBs, with capital gains tax exemptions on maturity and 2.5% annual interest payment, offer a safe and tax-efficient investment route for Indian investors,” Shenoy explained.
Shenoy also mentioned that demand for SGB could also see a pick-up in the secondary market as investors prefer SGB over physical gold. Prakash added: “SGBs not only provide a secure alternative to physical gold but also eliminate storage and purity concerns. The government support and fixed interest rate increase its attractiveness.”
Can cryptocurrencies offer a hedge?
Experts say the crisis between Israel and Iran is unlikely to directly affect cryptocurrency values, as these digital assets are relatively insulated from geopolitical risks.
“Cryptocurrencies are still in the early stages and do not have a defined underlying asset. However, we saw a 6.5% correction in Bitcoin prices to around $27,500 after the recent rally. This suggests that investors may not view cryptocurrencies as a hedge against instability,” Prakash said.
Market-linked pension plans in times of volatility
Long-term investment vehicles like the National Pension System (NPS) or Unitary Insurance Plans (ULIPs) could experience temporary volatility, but are generally protected from short-term geopolitical shocks.
“Market-linked pension plans are exposed to multiple asset classes, such as equities, debt and government securities. While the equity component may see some fluctuations, debt provides stability,” Shenoy said. He noted that pension plans tied to government bonds or fixed-income securities would likely not be affected.
Strategies to protect your investments
In times of geopolitical uncertainty, it is essential to diversify your investments across asset classes. Experts recommend a balanced portfolio of stocks, debt and gold. “Diversification is the key to reducing portfolio risk. Avoid panic selling as it often results in losses,” Shenoy advised.
Key strategies for investors include:
- Review asset allocation to ensure alignment with financial objectives.
- Maintain an emergency fund in liquid assets such as short-term debt funds.
- Avoid drastic changes in long-term investments.
Prakash noted, “For those who have a diversified portfolio, gold can act as a stabilizer. A well-balanced mix of assets can help minimize losses during times of market stress.
Develop a personalized diversification strategy
The appropriate diversification strategy will vary depending on each investor’s risk tolerance, investment horizon, and goals. “For example, one client might have 60% equity and 40% debt, while another might have 40% equity, 30% debt, and 30% gold. Both may have similar risk preferences but choose different asset mixes,” Prakash said.
Shenoy added: “It is important not to overload yourself with stocks in times of uncertainty. Maintaining a portion of high-quality debt ensures stability. Strategic asset allocation should remain unchanged during crises as it is a long-term plan. Changing it in response to short-term events could be detrimental.”
Prakash advised: “The old saying ‘don’t put all your eggs in one basket’ applies here. An ideal diversification strategy includes gold, which can act as a hedge against uncertainty. A portfolio with too much capital may not be able to weather sudden market declines. The goal should be to maintain a balance of assets that can withstand crises and continue to generate profitability in the long term.”
First published: October 4, 2024 | 16:07 IS
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