Markets Take A Beating On War Tensions
Stock prices fell as the escalating Middle East-West Asia conflict pushed crude prices higher and triggered investor flight to safe havens
On Episode 812 of The Core Report, financial journalist Govindraj Ethiraj talks to Shajikumar Devakar, Co-Founder & CEO at Neo Wealth Management, as well as Ajay Kedia, Director at Kedia Advisory.
SHOW NOTES
(00:00) Stories of the Day
(00:50) Markets take a beating on war tensions but seem to have avoided the worst, for now
(04:37) Indian carriers are second most affected even as thousands of passengers continue to be stranded in West Asia
(05:30) What are ultra high networth investors doing at a time like this?
(12:18) Prices of commodities including oil spike, where could they go next
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NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on feedback@thecore.in.
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Good morning, it's Tuesday, the 3rd of March and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital.
Our top stories and themes…
The stock markets take a beating on war tensions but seem to have ducked the worst for now.
Indian carriers are the second most affected, even as thousands of passengers continue to be stranded in West Asian airports.
What are ultra high net worth investors doing at a time like this?
Prices of commodities including oil spike, where could they go next?
Markets and the West Asian Conflict
This is a holiday shortened week as in today is a holiday for Holi and the markets and banks are closed. The West Asia conflict entering its 4th day now, even as thousands of Indians continue to be stranded across the Gulf states including the Emirates, there could be differing views but it would appear that India's benchmark indices were somewhat steady given the sheer volume of negative views emanating from West Asia and slamming global markets over the weekend. The stock markets here fell but not as much as they could possibly have on Monday which is the first day of a holiday shortened week in India but will otherwise be a long week for the world at large.
Stock prices fell as the escalating Middle East-West Asia conflict pushed crude prices higher and triggered investor flight to safe havens like gold and the dollar. The Middle East supplies about half of India's crude imports and is the source of 40% of remittances and the destination for 17% of India's exports according to various analysts quoted by Reuters. Nifty 50 was down 1.2% or 312 points to 24,865 and the Sensex was down 1,048 points to 80,238.
The day was of course much more choppy with the Sensex dropping much further but recovering towards the end. Now we of course we don't know how markets could behave on Wednesday that's tomorrow but it all depends on whether there is any let up in the action in the Middle East. The broader markets were down to the nifty mid cap and nifty small cap indices were down 1.6 and 1.7% each.
The rupee fell to its weakest in a month while the cost of hedging against further depreciation against the dollar rose and the Reserve Bank of India likely stepped into the market traders told Reuters while dollar sales by foreign banks also helped curb losses which fell about half a percent to close at 91 rupees 47 paise its steepest drop in more than a month. Gold prices are inching closer to their previous highs rising more than two percent as the U.S. Israel strikes on Iran continued on Monday in addition to the retaliation spot gold was at about $5,390 per ounce on Monday morning after hitting a more than four week high earlier in the session the peak was touched on January 29th and that was $5,594 per ounce so $5,594 versus $5,390 right now which is roughly $200 away. On Wall Street stock futures were down on Monday in the morning after the attack which led to oil prices rising and adding to overall war tensions.
Dow Jones futures were down about 1.2% S&P 500 futures were also down about 1% and Nasdaq futures were down about 1.4%. Back home the government on Monday held inter-ministerial deliberations with exporters and logistics players to assess the impact of escalating tensions in the West Asian region on India's trade and assured that it would take all measures to mitigate disruptions. Industry representatives at the meeting called by the Ministry of Commerce and reported by the Press Trust of India stressed on the need to maintain predictability in cargo movement, minimise avoidable delays and ensure seamless documentation and payment processes for exporters and importers. Meanwhile Europe-bound shipments from India are turning costlier and slower as global shipping lines avoid the Persian Gulf and Red Sea corridors and take a circuitous route around the Cape of Good Hope on the southern tip of South Africa.
Major carriers have suspended or restricted transits extending transit times by 10 to 20 days and raising freight rates by 40 to 50% on key India-Europe routes according to the newspaper Mint, quoting industry executives. Meanwhile Indian airlines and carriers are likely to be second most affected by closures in West Asia. Disruptions continued into Monday and Tuesday morning and there was no sign that Tuesday onwards would be any better.
It is quite likely that only a negotiated deal between Iran and the US would lead to a ceasefire which could facilitate the resumption of flights or specific assurances to states like Dubai, Abu Dhabi and Doha that they would not be attacked. It is possible of course because back-channel negotiations must be going on but we don't know and that might take a few days. The strain on Indian carriers is compounded by the fact that they have already been unable to use Pakistani airspace since the middle of last year after the border conflict according to a Bloomberg report adding that while re-routing over Iran added more than two and a half hours to flight times for the US, alternative paths skirting the entire Middle East would take even longer.
Portfolios in the Time of Conflict
The markets are turbulent of that there is no doubt. How should investors including high net worth and ultra high net worth individuals view their current portfolios in terms of action to take and what are they doing that others can maybe take a few tips from? I spoke with Shajikumar Devakar, CEO and co-founder of Neo Wealth and Asset Management in Mumbai. I began by asking him how he was reading the markets right now and his advice to clients.
INTERVIEW TRANSCRIPT
Shajikumar Devakar: Markets have been turbulent for the last 3-4 weeks in fact and geopolitical risk has escalated right now. Markets have behaved in response to what's happened over the weekend between Iran, US and Israel right. So obviously it has a big impact on how the equity will perform in the short run.
Having said that, the way we construct the portfolio at a design level, there is a broad asset allocation that is decided and our approach has always been to create a portfolio with multi-asset class and in the multi-asset class, equity is a dominant factor obviously going through the volatility right now. But we would also have fairly big exposure or reasonable exposure to the fixed income which is kind of treated as a safety part of the investment. Also exposed to gold, silver plus REITs and WITs and some allocation given to infrastructure as which acts as a stabiliser in the portfolio and be able to actually look at returns from a total portfolio allocation basis as opposed to only looking at equity.
Obviously equity is the darling of the market and dominant exposure in the portfolio and thus this become conversational and tactically try and look at allocating more money into equity in case should there be more escalation and leading to more volatility. And that is purely driven by asset allocation called tactically or strategically and look at valuation and look at the strength of India and basis that take a call from a long-term perspective. For a long-term portfolio I think all these opportunity or all this volatility is a big opportunity for clients to increase the exposure to equity and at a firm level our asset allocation committee has taken a call to go on an equal weight on equity this year.
We are extremely bullish on the large cap side and we would start to build large cap portfolios for our clients should there be more volatility in the near future in the client's portfolio we would start allocating money to equity otherwise we build a very very well diversified portfolio across asset classes and REITs and WITs and infrastructure has taken including precious metal has taken a sizable exposure in clients portfolios.
Govindraj Ethiraj: So you're saying the new asset classes that you're looking at relatively or you stepped up is REITs and infrastructure assets this year?
Shajikumar Devakar: It's been there for last couple of years. REIT is actually a 2017-18 born asset class in India to take exposure through listed REITs and since then we've been building REIT position for clients but in the last two years there are many more REITs who've gotten introduced in the listed space and we've been allocating money to REITs across five six options that we have in the country today. That's on REIT side in which also something in the last two years where we started to build exposure for clients started with NHIT then energy REITs and then various other options that came back.
So we've been building in REITs also as position infrastructure is the asset class which has always been there where you buy operating assets and in with them and then eventually it gets privately and publicly listed and the entire journey perhaps give you return higher than only buying in REITs. So infrastructure is also a portfolio or investment avenue that is getting at a design level we allocate money and then weights have been assigned and keep building it up over a period of time as and when we have options around infrastructure and in which as well.
Govindraj Ethiraj: Right and you said this year equity is almost half and that sounded like you've increased equity vis-a-vis other asset classes so is metal somewhere in the picture or I mean I'm sure it is but where does it stand now as you look ahead?
Shajikumar Devakar: So Govind we've always looked at portfolio from a multi-asset class precious metal has always been part of the portfolio there are multiple options around metal to participate so from you know earlier sovereign bond was dominant factor as a representation in the portfolio now ETFs are the one which is taking a dominant as part of the portfolio in the precious metal space so precious metal has always been there but the allocation was anywhere between 5 to 10 percent depending on client's profile and the asset allocation decision that we've taken in the past but equity when I said equal weight equal weight meant that at a strategic level whatever weight that we had decided and we stick to that weight if client has been advised or decided to actually take a 50 exposure to equity on a overall portfolio today we would be at 50 and if markets were to be absolutely volatile and give you an opportunity to buy equity as an asset class over time in this geopolitical risk we would increase exposure to equity but right now we are maintaining a strategic allocation and tactical movement to increase or decrease exposure to equity is purely driven by where market stands in terms of valuation and various other parameters so macro and micro looks extremely good for India having said that you know geopolitical risk is something one has to take into account before allocating to risk assets when there is a risk of trade right now in the market.
Govindraj Ethiraj: Right last question so what are ultra high net worth individuals telling you or doing right now or indicating in terms of their preferences particularly at a time like this and can anyone take away anything from that?
Shajikumar Devakar: Ultra HNI clients actually solve for portfolio preservation and then grow the portfolio over time. Ultra HNI clients really don't take binary calls and take aggressive approach to building the portfolio in their mind preservation of capital is also equally occupied and with that mandate you would certainly build a portfolio that are very diversified to ensure that you know we don't take any concentrated risk on any other asset class including equity and as a result portfolio is very steady right now given that equity has been little volatile returns haven't come by in the last 18 months from equity but you know that is also an opportunity going you know we've seen in the past when returns haven't been great for couple of years and it is followed with equity is not linear so therefore it is always followed by good returns that you would end up actually making from equity and thus like I said we are not rushing into buying equity we'll watch this escalation closely as and when we feel from a valuation wise India is absolutely at a level where prospective returns are looking good is when we will start to invest.
To answer to your question it is a diversified portfolio and clients what we are solving for them is to preserve capital and we'll grow it at a certain rate of return with a diversified portfolio across asset classes.
Govindraj Ethiraj: Right Shaji, thank you so much for joining me.
Shajikumar Devakar: My pleasure, thank you so much Govind.
Impact of the Conflict on Oil and Gold
Oil and natural gas prices jumped on Monday following continued aerial attacks and shutdowns of oil and gas facilities across the Middle East and disrupted shipping in the crucial Strait of Hormuz. Brent crude futures rose as much as $13 to $82.37, their highest since Jan 2025 or more than a year and two months before falling back to trade around $78.40 a barrel on Monday morning. Saudi Arabia shut its biggest domestic oil refinery after a drone strike according to Reuters and the widening conflict also left at least three tankers damaged, a seafarer killed and 150 ships stranded around the Strait of Hormuz.
On a typical day, says this Reuters report, ships carrying oil equal to about one-fifth of global demand and they sail through the Strait along with tankers hauling diesel, gasoline and other fuels to major Asian markets including China and India. It is also the route for about 20 percent of the world's liquefied gas. And as we discussed earlier, gold prices are inching back to their highs and this was something that was predicted and of course other commodities are also rising.
I reached out to commodity analyst Ajay Kedia and I began by asking him how he was seeing the latest price movements and what trends that he was gleaning from them looking ahead.
INTERVIEW TRANSCRIPT
Ajay Kedia: It's not a turbulent week, we can say turbulent year has been started. We have seen commodity market has on toss since January onwards only. We have seen initial rally, then a fall.
But surprise was this Saturday when we have seen talks were going on between US and Iran and all of a sudden there was a news of strike and after that we were expecting a very good gap-up opening. No doubt today steel gold is up by 2%, crude is up by almost 8%. That clearly shows geopolitical tensions are still in the market and we can see some more upside for both the commodities.
Govindraj Ethiraj: Right, so people were expecting the stock markets to fall more at least in India and gold prices to rise further and maybe even oil to stay above $80 but all of that has not happened. Why is that?
Ajay Kedia: I think market has been very much mature let it be gold, crude or equity market never fall in a same pit again and again. See last year also we have seen US and Iran tension was been there and this time also it was in line of expectation only however we were also expecting there should be a volatility would be too high because the gravity of this war or tension is more after there was a strike in Dubai and nearby countries. So we were expecting this should be more impactful but I think market has absorbed everything.
Only we have seen a gain of almost 2.5% or $100 move in gold prices but this is not an end, this is just a start because I think unless and until things are starting de-escalating we may see some new highs in case of gold and crude also.
Govindraj Ethiraj: So you are saying that prices could still keep rising or for that matter falling in stocks because all the selling may not have happened or all the buying may not have happened as in on Monday.
Ajay Kedia: So I think there are two parts, first of all let's say there are four important triggers which one has to look. First is WIX, global WIX are still on higher side, Indian WIX is around 16.5-17 which is not high what we have seen during COVID or prior to that. That means Indian numbers are quite good and we Indian investors have already been absorbed this type of fallback.
So I think there is a mature decision we have seen in today's market session but coming on the global scenario or let's say gold-silver, global WIX is rising, it is around 21.5, dollar index has again come back to the level of 98. Whenever WIX is rising, dollar is rising, something uncertain is there in the market because gold is also around 5400. But with crude above 80 in the morning suggests, uncertainty is prevailing in Middle East and it will be more escalating.
We have never seen in today's session uncertainty index is coming down or WIX is coming down. So I think gravity is still there and we may see further upside in commodity like gold and crude which is actually a replica of any tension whenever it arises.
Govindraj Ethiraj: So we have been hearing some statements including from the Organisation of Petroleum Exporting Countries plus or OPEC plus on increasing supply which they usually do when tensions increase. But how are you seeing the current demand supply scenario for both gold and silver, whether or not it affects the prices right now?
Ajay Kedia: So starting with the crude oil prices since last year, we have been already oversupplied. Our supply is going quite high as compared to demand. That is why in last year, despite of all this tension, we were never cross $70 mark for brand.
But this time, I think the geopolitical tension would be more because streets of Hormuz is going to be more vital location as of now. No doubt we have a good supply. OPEC will be increasing the supply in the month of April.
But as of now, the transit premiums or insurance have been on higher side. And unless until that cools down, we expect crude is going to be on higher side. Yes.
In the morning, we have seen brand going around $82, $82.50 and coming back. That clearly shows severity is been slightly light only as of now. But despite everything, what we read is around $88, $90 should be the level we can see for crude.
Coming on gold, geopolitical tension still going on since last three, four years, central bank, ETF, everything is in place. Only the war premium is been now added. Maybe short coverings or we can say ETF buying will continue to be there as a safe haven buying and maybe a new high of $5,700, $5,800 is going to be there as whatever the extra weight gold has been added in last one and a half year that has wiped out in the month of Jan when prices has corrected by $2,400.
Technically, fundamentally looks sound. We may see new highs coming back in gold prices.
Govindraj Ethiraj: Right, Ajay. Thank you so much for joining me.
Ajay Kedia: Thank you, Govind.
