Indian stocks brace for Israel-Hamas war impact

While they expect no immediate cause for panic, they are closely monitoring the evolving situation as any widening of the war could profoundly impact Indian stocks because of a surge in oil prices, and heightened volatility in rupee and bond yields .

Israel’s benchmark TA-35 Index, tracking 35 top companies on the Tel Aviv Stock Exchange, which runs from Sunday through Thursday, plunged 6.47% on Sunday. Indian benchmarks Nifty and Sensex on Friday traded around 3% below their mid-September record highs, while small- and mid-cap benchmarks ruled 2-3.5% below their highs amid selling by foreign institutional investors.

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“It’s an evolving situation that we need to gauge for a couple of days before taking any decision,” said Samir Arora, founder and fund manager of Helios Capital Management. “I don’t think there’s any cause for panic yet, though we might see a knee-jerk gap-down opening, in sync with other markets. It’s better not to pre-empt but to react.”

Arora said unlike the Ukraine war of February last year when he reduced his fund’s net long position by 15%, he won’t do anything instantly this time.

Crude prices last week corrected 9% from the year-high after oil cartel Opec proposed to keep output cuts steady at its 5 October meeting. Brent currently trades at $86.29 a barrel. But, a prolonged and expanding conflict is a clear worry, as market experts raised the possibility of a state actor in the well-orchestrated and unprecedented attacks on Israel.

“Our markets could gap down, taking cues from Asia, but we could recover by the end of the day,” said Shiv Sehgal, president and head of Nuvama Capital Markets. “Volatility could rise in the days ahead, though, given the impact of any likely escalation and widening of the theatre on commodities like metals and oil. It’s hard to imagine Hamas would consider such a brazen attack without at least some sort of consultation with its benefactors. Indian markets will also be focused on the upcoming results season and the state elections from next month.”

An oil rally could be driven by short-covering by hedge funds that hold significant short positions. ICE offers futures trading in West Texas Intermediate (WTI), a light sweet crude grade, where managed money held net shorts of 27.38 million barrels as of a 3 October report. Actual users and hedgers also were net short by 26.6 million barrels while “others” were long by 72.6 million barrels, according to US derivatives regulator Commodity Futures Trading Commission.

“So far, the range for WTI is around $77-88, but if the war spreads, you could see a short covering rally,” said Gnanasekar Thiagarajan, director of Commtrendz, a commodity researcher.

Risk aversion trades, where foreign investors sell riskier emerging market assets and shift to the safe havens of the dollar and gold, can happen if the conflict intensifies, said Nilesh Shah, managing director at Kotak Mahindra Asset Management Co. The dollar closed little changed at 83.24 to the rupee on Friday. The rupee is just 5 paise off its record high of 83.29 logged in October last year.

India imports 85% of its crude requirement, and a rise of dollar-denominated assets would result in a higher outflow of dollars, making exports costlier because of a weaker rupee.

Foreign portfolio investors (FPIs) who purchased shares worth ₹1.69 trillion between March and August, which drove markets from a low of 16,828.35 on 20 March to a record high of 20,222.45 on 15 September, booked profits to the tune of ₹14,768 crore last month amid rising bond yields in the US to 16-year highs. Their selling was absorbed by domestic institutional investors, who purchased shares worth ₹14,849 crore. A rise in bond yields results in US-based FPIs reversing flows from riskier emerging markets assets to US treasuries.

“Opec nations are mindful of not increasing the oil price beyond 10-12% as they have an understanding in practice with the US to ensure that oil prices are not increased beyond certain levels. Thus, under the knee-jerk reaction to this attack, prices may go up by 10-12% in the near term,” said Deven Choksey, managing director of KR Choksey Shares and Securities.

He also feels the market could open lower on Monday but expects it to recover later.

Options data indicates a narrow, 200-point range of 19,550-19,750 for the Nifty this week, based on Friday’s closing data. This could change depending on global cues to the Israel conflict.

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Updated: 08 Oct 2023, 11:35 PM IST