Iran war: Stock investors pay Rs 23,00,000 crore price for a conflict far from home

Indian stock investors have paid a price of Rs 23,00,000 crore, or roughly $250 billion at Rs 92 to a dollar, for a war in the immediate neighbourhood that is hardly into its second week. While the US President Donald Trump has vowed to end the Iran war soon, the conflict has tested investor nerves that were already reeling under a no-return market scenario for the past 21 months.

The US-Israel joint strikes on Iran that started on a weekend (February 28) have punished markets globally, as the war escalated to Gulf countries and the Strait of Hormuz, choking fuel supplies. As things stand today, both the NSE Nifty and the BSE Sensex are trading at levels similar to those in June 2023.

The market capitalisation of all listed Indian stocks has fallen Rs 22,65,831 crore to Rs 440.84 lakh crore on Thursday compared with Rs 463.51 lakh crore on February 27. 

The market is not upset unnecessarily. The impact of West Asia crisis has started reflecting on at least 10 sectors, which may have bearing on quarterly earnings in the near future.  

"The economic consequences of the conflict will depend heavily on its duration and intensity. A prolonged conflict would likely sustain higher energy prices, increase inflation risks, weaken emerging-market currencies, and reduce global risk appetite. For India, higher energy imports combined with weaker capital flows could weigh on macroeconomic stability and equity markets," said Hitesh Jain at YES Securities.  

A rapid de-escalation would stabilise commodity prices and limit spillover effects on global markets, he said.

But the strategic nature of the conflict suggests it may be prolonged, analysts warned. 

ICICI Securities noted that crude oil prices and Nifty returns have exhibited a curvilinear correlation in the past, which implies that at sub $90-100 per barrel, oil prices and Nifty's performance are positively correlated driven by the former’s signal as a barometer for gauging global demand conditions. 

"However, this phenomenon reverses as prices surpass the $90–100 a barrel range, as it begins to severely impact India’s oil import bill and portends supply shock from a geopolitical crisis or other macro reasons – also, a likely precursor to waning global demand," it noted.

The US-Iran war is fundamentally about regime survival for Iran rather than military victory, which reduces incentives for de-escalation. 

Iran is also not isolated. Both China and Russia have strong incentives to prevent Iran from suffering a decisive defeat, as that would strengthen United States influence in regions within their strategic sphere, YES Securities' Jain said.

"An important asymmetry exists in the economics of warfare. Iranian drones reportedly cost roughly $20,000, while missile interceptors used to neutralize them can cost about $4 million. This cost imbalance allows Iran to impose disproportionately high defensive costs on the United States and its allies," Jain said.  

Last instance of the negative correlation of crude prices and Nifty was witnessed in 2022, when oil prices spiked beyond $100 a barrel for 3–4 months driven by Russia’s invasion of Ukraine, which threatened to take away Russia’s oil from the global supply. 

"The resulting volatility (Nifty fell 10 per cent) created the foundation for the big equity rally seen over CY23," ICICI Securities said. 

Rahul Singh, Chief Investment Officer – Equities at Tata Asset Management said valuations have become more reasonable with the Nifty trading around 20 times earnings. "While near-term sentiment may remain sensitive to global developments, sectors such as consumer and pharmaceuticals could remain relatively insulated, while metals and energy may benefit from higher commodity prices," he said.

PhillipCapital in a note last week said strategies of churning and buy-on-dips may aid alpha creation. "FII inflows (if they happen) would be an added positive, although Indian valuations may not yet be as compelling as other markets," it said.