Only a handful of economists foresaw the possibility of a military conflict in Feb 2026. The strongest clue was in the Gold and Silver prices in Jan: a war was due, but no one knew with certainty it would be a US-Iran war.
Now that the war is underway and crude oil has surged more than 50 per cent from the first day of February, let us analyse the list of opportunities and threats.
Rising oil prices are a drag on the economy, as most energy needs are met by fossil fuels. Since elections are due in many states in India, the government cannot raise the fuel prices for fear of backlash.
The biggest news we received this week was the possible closure of the Strait of Hormuz, a waterway that carries 90 per cent of our LPG imports and 30 per cent of our crude oil.
The reassurance from the central government that fuel prices will remain unchanged is comforting, as the public would otherwise have rushed to fuel stations to refill their vehicles. A major catastrophe is averted as a demand spike combined with a supply shortage would have worsened the situation. A fuel shortage will definitely create supply chain disruptions. The economy will take a massive hit, and the uncertainty of job loss and income loss will surface.
The stock markets have not taken the US-Iran war lightly. Our benchmark indices have fallen 11.5 per cent from the recent all-time high in January this year, but the real pain is in the small-cap and mid-cap space. The real question would be “Is this the right time to buy?”
We often see investors stay away when sentiment is negative. They prefer to invest only when the markets are euphoric. Actually, we need to do the opposite, i.e., invest when it's down and stay away when it's euphoric.
To better understand this, let us elaborate on the concepts of Premium and Discount in the market.
Let us assume the price of a stock ABC is ₹1500. When the times are good, people are ready to pay more to own this stock. Since financial market pricing is auction-driven, the buyer is always the one who quotes the higher price. The moment someone quotes ₹1505, we normally see new buyers appearing at ₹1510, ₹1515, ₹1520, etc. This is the concept of premium: buyers are willing to pay more for an asset they expect to rise in price. Also, the sight of rising prices would instil a sense of missing out (FOMO) and trigger buying behaviour.
Similarly, when stock prices fall, the auction system favours the seller who is willing to quote the lowest price. That is why, when prices fall to ₹1495, you see more sellers appearing at ₹1490, ₹1485, ₹1480, etc. The rationale is simple: the sellers feel they might end up losing more if they hold onto these positions. The Fear Of Losing More (FOLM) kicks in, triggering selling behaviour.
When times are good, a buyer is willing to pay a premium, and when times are bad, the seller offers a discount to offload their stake.
Yes, the war is a macroeconomic event and could change the fundamentals of a stock or a sector. There could be severe impacts on revenue, profit, operating margin, or operations. This is where some good research skills, homework, and patience can help you.
Note: Prices shown to increase/decrease by ₹5 for illustration. Actual Bid/Ask could be as narrow as the tick size.
Post-war, things will get back to normal. We may see the same companies recoup their lost market share or capitalisation. We could even see newer sector leaders due to their resilience and innovation. Governments would always go into firefighting mode by increasing public spending and creating more opportunities. They would incentivise private players to invest more in the economy.
Investment advisors, wealth managers, AMCs, and mutual fund managers utilise this opportunity to rebalance their portfolios. To add to the winners and exit from the losers. So should you. Do not waste a crisis.
If you are scared to handpick good stocks, then opt for Equity Mutual Funds. Get help from experts to identify pockets of opportunity. MFs are highly diversified instruments that spread risk by investing across different asset classes.
Note: Always invest capital that you can afford to lose. Sometimes people are so excited that they borrow and invest—that will prove counterintuitive.
The writer is a SEBI Registered Investment Adviser (RIA), INA000021757, and author of ‘How to join the top 1% options traders club’.
The opinions expressed in this article are those of the author and do not purport to reflect the opinions or views of THE WEEK.