Trade outlook for June 23 is poised at a critical juncture. While on the hand the Nifty finally closed above the key 25,000 mark last Friday after days of consolidation, the situation across West Asia remains volatile. In fact, the Israel-Iran conflict has entered a “decisive phase” after the US bombed three major Iranian nuclear site. It goes without saying that all of this has led to significant apprehension in the equity markets too. Investors are bracing for a sharp surge in crude prices on supply worries and flight to safe haven investment like gold.
The share market in Israel hit record highs and most stock markets in the Gulf region seem unfazed by the rising tension in the region. But what’s the prognosis for our markets when they open for trade tomorrow morning?
Oil the big worry for India: Can the economy support the surge and for how long?
US strikes on Iran’s three main nuclear facilities have once again raised concerns about oil prices surging. The shut down of the Strait of Hormuz is the big worry. This Strait is one of the world’s most critical chokepoints, through which a fifth of global oil and gas supply flows. From the Indian perspective, about 2 million barrels per day (bpd) of crude transits through this narrow waterway. Essentially this is close to 40% of the total 5.5 million barrels of crude imported every day.
Nilesh Shah, MD – Kotak Mahindra AMC explained that the, “domestic factors support current valuation for long-term investors expecting moderate returns. We need to keep a watch on availability of oil as well as price. We have enough forex reserves to manage higher oil prices in double digits. Oil prices crossing triple digit or restricted supply will have an adverse impact on market. Traders should be extremely cautious. Investor should use correction as an opportunity to accumulate.”
Market veteran, Ajay Bagga added that, “Markets will see a risk-off. Expect gap downs in Asian markets with a flight to safe haven. Oil will shoot up as a cornered Iranian regime will hit shipping in the Persian Gulf and in the Red Sea via the Houthis in Yemen. China will need to play a role in keeping oil flowing in the Persian Gulf.”
However, India having diversified its sources of imports is seen as a silver lining. Currently, alternative sources – from Russia to the US and Brazil – are readily available as well, as per senior Govt officials. The big question is can it be adequate and will it be successful in keeping oil prices under control.
Is Gold set to fly higher?
The other big worry for the markets is of course the potential spike in Gold as safe haven buying gains momentum. According to Bagga, “Gold is the second biggest reserve currency in the world and overall 21 trillion of safest assets in this geopolitical morass. Gold will fly. Silver is 60% dependent on industrial and renewables demand. Recession looms as the conflict widens, silver will struggle in the slightly medium-term.”
Gold prices have surged as much as 3% in the last week on anticipation of tension escalating and flight to safety by investors.
Will FII selling continue further?
After nearly two months of brisk FII buying and a net buy of Rs 19,860 crores in May, foreign institutional investors have been net sellers in June so far. The FII activity till June 20 indicates they have been net sold Rs 4192 crore. Given the global uncertainty dominated by geopolitics, particularly the war in West Asia, can one expect the FII activity to track geopolitical developments?
Dr VK Vijayakumar, Chief Investment Strategist, Geojit Investments highlighted that, “In the first half of June, FIIs were sellers in FMCG, power, consumer durables and IT. They were buyers in financials, chemicals, capital goods and realty. The buying reflects the fair valuations and good prospects in these segments. And the selling reflects the relative high valuations and diminished prospects in those segments.”
He added that FIIs may continue to track geopolitical developments at the moment. They have been net sellers in the debt market. The yield differential between US and Indian sovereign bonds is at a historic low of around 2%. “Given the currency risk, it doesn’t make sense to invest in bonds and, therefore, this trend of FPI selling in bonds is likely to continue,” he concluded.