Go large, be selective and cautious, say experts, as geopolitical tensions rise

• Investors have turned cautious after geopolitical tensions escalated in West Asia.
• It’s too early to say if bear markets will set in, and will depend on how the other West Asian nations react, experts say.
• As investors turn risk averse amidst rising uncertainty, mid and small cap stocks will see sell-offs.
  

India’s bull run might take a breather as they brace for the impact of the Israel-Hamas conflict. Indian investors turned cautious on Monday and might continue to remain so until a clearer picture on how far and wide the West Bank tension spreads.

The Indian benchmark indices have been gaining comfort from the falling crude oil prices last week. Now, with a possibility of a spike, which can lead to another round of high inflation and high interest rate situation, investors turned risk-off. That’s when investors sell-off equities to head for safe havens like gold and bonds.

“An unforeseen escalation in the Middle East has rekindled pessimism in global markets,” said Vinod Nair, head of research at Geojit Financial Services. Even before the tensions, foreign investors have been pulling out from the Indian markets. FPI outflows crossed ₹10,000 crore in September.

It’s too early to say if bear markets will set in, and will largely depend on how the other Middle Eastern countries react to the current tensions.

“Nothing so dramatic as bull markets turning into bears. It will take some time before we can form any meaningful opinion on how the situation will turn out,” Arun Kejriwal, founder of Kejriwal Research & Investment Services told Business Insider India.

Jateen Trivedi, VP Research Analyst at LKP Securities says that if nations like Iran get involved in the war, it could push crude oil prices even higher. “The region is a crucial hub for global oil supply, and any disruptions in production or transportation can lead to supply issues,” he added.

A correction in sight

This year, Indian equity markets gave 8.7% returns – twice as much as 4.4% provided by the emerging markets. Apart from short term movements like a pause in rate hikes, G20 and others, they were also guided by the possibility of the current government retaining its mandate in 2024.

After a possible crude shock, experts foresee Indian investors consolidating their stock portfolios basis the returns they have provided. According to a report by Kotak Institutional Equities, the Indian markets are in a rare confluence of bull, bear and a bubble phase at the same time.

“Several top large-cap and quality mid-cap stocks have hardly given any returns in the past 2-3 years. Other large and mid-cap stocks have delivered decent returns, while several mid and small caps stocks have given fantastic returns in the past 6-9 months,” the Kotak report said.

“A correction in the mid cap space is long-overdue. We can’t blame it on the war, as they have been running ahead of time,” Kejriwal said.

Most mid and small cap stocks are trading well above the 12-month fair values, says Kotak. Nair too agrees that there would be consolidation in the mid and small-cap segments due to their premium valuations.

It’s time to go large

The only stocks that might see a good performance in the months to come are the large-cap stocks which did not gain much from the bull run.

“We see better investment opportunities and reward-risk balance in the top large-caps than in other parts of the market. We expect the large-cap laggards of 2022-23 to do better over the next 6-12 months,” said Kotak.

Geojit Financial Services also added that long-term investors must slowly accumulate high quality stocks on declines, without taking big risks. Mid and small caps are riskier and large caps are much safer in comparison and that’s where markets could go towards.

As the war picture remains hazy, the market would prefer to go on the ‘sell on rise’ mode and most experts advise against taking big risks.