Iran-Israel Conflict: How It Impact on India's Share Market?

by Siddharth Singh Bhaisora, Alina Khan

Published On May 9, 2024

In this article

As tensions between Iran and Israel escalate, their potential impact on global markets, particularly in countries like India, is a pressing concern. The recent increase in hostilities, marked by Iran's drone and missile attacks on Israel in response to earlier conflicts, has escalated fears of a full-scale conflict in the Middle East. These developments could have significant repercussions for the Indian stock market due to India's economic ties and reliance on Middle Eastern oil.

India, which imports over 80% of its oil requirements, is particularly vulnerable to fluctuations in crude oil prices that such geopolitical tensions typically incite. Recent events have already led to a notable increase in Brent crude oil prices, which surged by 6% in the past two weeks alone, now trading above $90 per barrel. This trend is exacerbated by the ongoing geopolitical instability and OPEC’s decision to extend production cuts until June 2024, culminating in a 17% rise in Brent crude prices year-to-date.

This article will explore how the unfolding Iran-Israel conflict might influence the Indian stock market, focusing on key aspects such as the impact of rising oil prices on economic stability and market volatility. Understanding the dynamics of the Israel war effect on stock market and the broader Israel war impact on stock market is essential for investors and policymakers alike in navigating these uncertain times.

Global Stock Market Reactions and Economic Implications

Currently, market reactions have been relatively subdued, but the situation is volatile. The risk of significant disruption to Iranian oil exports, which could reduce global supply by 1-2 million barrels per day. Such a scenario could trigger a steep increase in oil prices, reminiscent of past conflicts that severely impacted global oil supply and prices.

Oil prices have already risen over 2% to surpass $92 and gained 7.5% in a week. Historical precedents, such as the 1973 oil embargo during the Yom Kippur War, saw oil prices skyrocketing over 300%. However, the current geopolitical landscape in the Middle East, including improved relations between Israel and some Arab nations and a more diversified global oil supply, might mitigate some risks.

A war between Iran & Israel, could mean an increase in oil prices further as it holds 10% of global oil reserves. The Strait of Hormuz, between Iran UAE & Oman accounts for 35% of global LNG trade and 21% of global oil passes through this narrow 30 miles strait. If the war escalates this could disrupt critical global oil supply routes.

Potential for Inflation and Market Disruption Globally

An escalation could also reverse the recent trend of easing inflation and the end of global rate hikes. The spike in oil prices last year, following Russia's invasion of Ukraine, led to significant inflationary pressures. Similar circumstances now could see a resurgence of inflation, especially if Iran becomes involved and commodity prices soar.

Analysts caution that higher commodity prices and external shocks could halt the disinflationary trend. Current inflation expectations in the U.S. and the euro area remain above 2%, indicating ongoing concerns about inflation stability. This situation could also exacerbate conditions for bond investors, with major indices like the S&P U.S. aggregate bond index showing significant declines from their peaks.

Strong Dollar Surge:

As geopolitical tensions drive investors towards safer assets, the U.S. dollar and Swiss franc have strengthened significantly. The dollar's climb towards 150 yen and its strong performance against the euro indicate heightened demand for safe-haven currencies. However, if escalating oil prices and inflation lead to a U.S. recession, the strong dollar trend might reverse. The yen could also strengthen as Japanese investors repatriate funds in response to global risks.

Impact on Emerging Markets:

The Israel-Gaza conflict has adversely affected the financial markets of nearby regions including Egypt, Jordan, Iraq, and to a lesser extent Saudi Arabia, Qatar, and Bahrain. This conflict adds to the challenges facing emerging markets, although she remains cautiously optimistic that many are currently withstanding the tensions without severe impacts. Conversely, a regional escalation could significantly increase oil prices by 20%, which would severely impact oil-importing countries, many of which are already facing economic difficulties.

Tech Sector Jitters:

The tech sector often reacts inversely to trends in the oil and gas sector. According to MSCI's indices, global tech stocks tend to suffer as oil and gas shares rise, a pattern observed during the Ukraine conflict in 2022. This trend could reemerge if U.S. interest rates rise to counter inflationary pressures from the current Middle East tensions. Additionally, the conflict poses risks to global digital infrastructure, notably in Egypt, a critical juncture for intercontinental internet cables. Meanwhile, airline stocks have declined, whereas aerospace and defense shares have seen gains, reflecting shifting investor focus amidst ongoing hostilities.

Overview of India's Stock Market

Recent data from the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) illustrate this turbulence. The recent escalation between Iran and Israel has had a pronounced impact on Indian financial markets, with major indices BSE Sensex and NSE Nifty experiencing significant declines. After reaching record highs on April 9, 2023, with the Sensex at 75,124.28 and the Nifty at 22,775, these indices faced losses over 4 consecutive sessions, erasing substantial market value. These fluctuations are closely tied to international news, with investor sentiment heavily influenced by developments in the Middle East.

The impact of the Israel war on the Indian stock market is evident from these patterns of sharp declines during heightened tensions and subsequent recoveries on indications of conflict resolution. For example, following the initial reports of Iran's attacks on Israel, the Sensex dropped by nearly 1.5% in a single trading session, reflecting immediate investor panic. However, it regained half of this loss in the following days as initial fears were somewhat allayed.

The question of will Israel war affect Indian stock market is crucial, as India's heavy dependence on oil imports makes it susceptible to any disruption in Middle Eastern oil supplies. The Iran war effect on stock market is similarly profound, as any potential conflict could disrupt oil flows, thereby spiking oil prices and increasing the cost of imports for India. This would lead to increased inflationary pressures and could hamper economic growth, further affecting the stock market.

Both the Israel war effect on stock market and the broader Israel war impact on stock market are significant for India. Investors and analysts must keep a vigilant eye on these international events, as their outcomes could have far-reaching implications for market stability and investment strategies in India.

Iran-Israel War Direct Impacts on India's Stock Market

The direct impacts of the Iran-Israel conflict on India's stock market are becoming increasingly evident as tensions escalate, with significant repercussions for key sectors of the Indian economy. Following the intensification of hostilities, major Indian benchmark indices such as the Sensex and Nifty have seen a decline of nearly 1%, a tangible manifestation of the impact of the Israel war on the Indian stock market.

1. Crude Oil Concerns:

Iran is a crucial player in the global oil market, being the third-largest producer among the OPEC countries. India, heavily reliant on oil imports, covering about 80% of its needs, faces increased financial strain due to potential spikes in oil prices.

According to analyses by financial experts, there is a pronounced concern that if the conflict between Iran and Israel escalates into a full-scale war, Brent crude oil prices could surge past the $100 per barrel mark. This speculation is not unfounded, as early signs of such an impact were observed when stocks of major oil marketing companies like HPCL, IOC, Adani Total Gas, and BPCL fell up to 3% in response to rising oil prices. This shows a clear Israel war effect on stock market specifically in the energy sector.

Moreover, the influence extends beyond oil companies. The tyre and paint industries, which rely on crude oil derivatives for manufacturing synthetic rubber and paints respectively, have also experienced downturns. Stocks of leading tyre manufacturers like MRF, Apollo Tyres, and CEAT fell by up to 2%, demonstrating how the Iran war effect on the stock market reaches into diverse industrial sectors.

2. Currency and Inflation Pressures:

A devalued currency can worsen the trade balance, escalate inflation, and create a fiscal strain. Rising oil prices could deteriorate India’s fiscal health by weakening the Indian rupee and escalating inflation rates. Increased crude oil prices negatively influence India’s currency, leading to a depreciating exchange rate which is detrimental to India’s economic balance, stirring negative sentiments in the share markets.

Rising commodity prices due to Middle Eastern tensions can push inflation rates beyond targets and increased input costs across various manufacturing sectors, influencing central bank policies globally. Heightened inflation expectations can delay expected rate cuts by the U.S. Federal Reserve, thus maintaining high bond yields and affecting global investment flows into emerging markets like India. Advisors points out that while the Indian markets face short-term pressures due to rising oil prices and geopolitical uncertainties, the long-term fundamentals of the Indian economy remain robust.

3. Rate Cut Prospects Diminish:

The conflict might drive commodity prices higher, disrupting supply chains and inflating global prices, thus affecting inflation targets worldwide. This scenario could delay the expected U.S. Federal Reserve rate cut, maintaining high bond yields and potentially accelerating foreign capital flight from emerging markets like India.

4. FPI Outflows:

Increasing geopolitical risks make global investors cautious, leading to potential outflows of Foreign Portfolio Investments (FPI) from India. Given the high valuations in the Indian market, FPIs may look to reallocating investments to perceived safer havens.

In addition to these, the Indian stock market is also reacting to other global economic pressures such as changes in the India-Mauritius tax treaty and U.S. inflation rates. However, with signs that the conflict might not escalate further as indicated by diplomatic stances from global leaders, there might be some stabilization. Nonetheless, the element of uncertainty remains high, emphasizing the need for investors to stay alert. This interconnectedness highlights how significantly the will Israel war affect Indian stock market and requires keen observation and strategic response from investors and policymakers alike.

Iran-Israel Conflict Sector-Specific Impacts

With Iran contributing nearly 3% of global crude oil production and a significant portion of Indian oil imports passing through the Hormuz Strait, any disruption could lead to substantial increases in oil prices. Here are the key impacts broken down by sector:

Energy Sector Vulnerability:

  • India, as the third-largest importer of crude oil, is profoundly affected by disruptions in oil supply from the Middle East. Iran's role as the third-largest OPEC producer means any conflict-related disruptions can critically impact global oil supply and prices.

  • Rising crude oil prices put upward pressure on inflation and impact the overall economic stability in India, affecting sectors heavily reliant on oil.

Automobiles, Transportation, and Aviation Sectors:

These sectors face direct impacts from rising fuel costs, which can increase operational expenses and reduce consumer demand.

Paints, Tyres, and Chemicals Sectors:

Industries reliant on petroleum-based products will see increased raw material costs, potentially reducing profit margins if these cannot be passed to consumers.

Cement Sector:

Energy-intensive industries like cement manufacturing will experience higher production costs due to increased prices for oil and other fuels.

Companies with Israeli Connections:

Certain Indian companies that have partnerships or significant business dealings with Israeli firms, such as Adani Ports, Sun Pharmaceutical, Dr. Reddy’s, Lupin, NMDC, Kalyan Jewellers, and Titan, might experience fluctuations due to geopolitical tensions.

Railway and Infrastructure Projects:

The ongoing conflict could impede the development of strategic projects like the India-Middle East-Europe Economic Corridor, affecting companies involved in this sector, including IRCON, Jupiter Wagons, and RVNL.

Oil Marketing Companies:

These companies could face adverse impacts from volatile oil prices, affecting profitability and operational stability.

What is the impact of Israel, Palestine & Hamas’ War on Indian stock markets historically?

While the conflict might drive negative sentiment in the short term, impacting indices like BSE Sensex and NSE Nifty, it's essential to consider the inherent strengths and resilience of the Indian economy. Historically, India has demonstrated the capacity to manage external shocks, and extensive pessimism may not be warranted.

1. 2000-2005 Second Intifada:

During the Second Intifada, a Palestinian uprising against Israel, global markets experienced volatility due to the uncertainty in the Middle East. The Indian stock market, still in its nascent stage of opening up to foreign institutional investors (FIIs), saw reduced inflows. The IT sector, which had started establishing connections with Israeli tech firms, faced potential disruptions.

2. 2006 Lebanon War:

When Israel and Hezbollah in Lebanon clashed in 2006, oil prices globally surged due to fears of a broader Middle Eastern conflict. India, heavily reliant on oil imports, saw its stock market react negatively to the rising oil prices. Companies in the aviation and logistics sectors, in particular, faced challenges due to the increased operational costs.

3. 2008-2009 Gaza War (Operation Cast Lead):

During this conflict, the global economy was already grappling with the financial crisis. The added geopolitical tension from the Israel-Gaza war further dampened the spirits of FIIs. The Indian market, already under pressure from the global financial meltdown, saw increased volatility, particularly in sectors like energy and IT.

4. 2012 Operation Pillar of Defense:

In November 2012, another Israel-Gaza conflict erupted. While the direct impact on the Indian market was minimal, the rising oil prices due to Middle Eastern tensions did affect sectors like aviation, logistics, and manufacturing. The IT sector, with growing ties in Israel, monitored the situation closely for potential business disruptions.

5. 2014 Israel-Gaza Conflict:

During the 50-day war in 2014, the Indian market showed resilience overall. However, sectors with direct exposure to the Middle East, especially aviation (due to oil prices) and IT (due to business operations), showed some volatility. The pharma sector, with growing ties to Israel, also kept a close watch on the developments.

Read this article to learn more about the Impact of War on Stock Markets: Israel-Palestine War & Impact on Indian Stock Markets

Strategies that Investors need to Follow

India’s relations with both Iran and Israel add complexity to its geopolitical strategy. Iran is a critical supplier of oil and a key player in regional security dynamics, especially concerning Afghanistan and the Chabahar port. Israel, on the other hand, is a vital partner in defense and technology. Navigating these relationships will be crucial for India amidst the ongoing regional tensions.

While the specter of global conflict can alarm investors, historical patterns suggest that wars like the ongoing tensions in the Middle East or the Ukraine-Russia conflict are unlikely to evolve into World War III. These regional conflicts, despite their intensity, often do not directly disrupt global economies unless they escalate to involve multiple countries. Investors, therefore, are encouraged to focus on factors such as central bank policies, inflation, and commodity prices, which are more likely to impact global financial markets.

Investment Diversification:

The unpredictable nature of geopolitical events highlights the importance of maintaining a diversified investment portfolio. Spreading investments across various sectors and geographical regions can serve as a buffer against the risks posed by regional conflicts. This strategy helps stabilize returns during periods of geopolitical uncertainty.

Maintaining a Long-Term Perspective:

Market histories show resilience in the face of geopolitical shocks. While short-term market reactions to war and tensions can be volatile, markets typically recover. Investors are advised to resist the urge to make impulsive decisions based on the latest headlines and to maintain a long-term investment strategy.

Staying Informed:

Being well-informed about global events is crucial in today’s interconnected economy. Understanding how regional events can affect global markets enables investors to anticipate potential impacts and adjust their strategies accordingly.

Opportunities and Defense Spending:

Although conflicts like those in Israel and Gaza can lead to economic instability, they also may create investment opportunities, particularly in sectors like defense, where increased spending is likely. Observing market trends during these times might reveal potential for gains in specific industries.

Sensex Graphs: 2023 vs 2024

The impact of the Iran-Israel tensions on the Indian stock market:

2023 Stock Market Performance:

    The Sensex showed a generally positive trend in 2023. For example, on December 15, 2023, the Sensex reached a new all-time high of 71,595 points, reflecting strong market sentiment and growth during that year.

    2024 Stock Market Performance:

      The year 2024 has seen more volatility in the Sensex compared to 2023. This volatility is partly due to the escalating tensions between Iran and Israel. Notably, on April 9, 2024, the Sensex reached a high of 75,124 points but has experienced significant fluctuations since then. As of May 10, 2024, the Sensex closed at 72,664 points, which shows a slight increase on the day but indicates overall instability in the market.

      The fluctuations in 2024, especially in relation to the Iran-Israel conflict, appear to reflect investor nervousness about the potential impacts of the conflict on global markets, particularly concerning oil prices and geopolitical stability. These factors are crucial for the Indian economy due to its heavy reliance on oil imports and the resulting economic implications.

      Overall, while 2023 was a year of strong growth for the Sensex, 2024 has been marked by heightened uncertainty and volatility, much of which can be attributed to external geopolitical tensions impacting global market sentiments and economic conditions.

      Conclusion

      The ongoing tensions between Iran and Israel have cast a shadow over global markets, with India's stock market feeling significant ripples due to its heavy reliance on Middle Eastern oil and the broader geopolitical implications. The potential for this conflict to escalate into a broader regional war introduces uncertainty that is particularly detrimental to economies like India's, which are intricately linked to global energy supplies.

      In 2024, the Sensex has exhibited marked volatility, reacting nervously to escalations in the conflict, as evidenced by fluctuations in oil prices and investor sentiment. This sensitivity is particularly pronounced given India’s status as one of the largest importers of crude oil. Sector-specific impacts have been evident, with energy, tyre, and paint companies facing increased costs, which could squeeze margins and dampen corporate earnings.

      Looking forward, the trajectory of India's stock market is likely to remain heavily influenced by the developments in the Middle East. Investors and policymakers must therefore maintain a vigilant approach, monitoring the conflict closely and being prepared to respond to rapid changes in the market environment. While India's strong economic fundamentals provide some resilience, the shadow of geopolitical instability underscores the need for strategic planning and risk management to safeguard investments and economic stability in times of international crises.

      Read the full article on Wright Research Impact of War on Stock Markets: Israel-Palestine War & Impact on Indian Stock Markets

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