Escalating tensions, fasten your seatbelts

Escalating tension in West Asia following Iran’s show of missile capability against Israel on Oct 1 unsettled markets worldwide. But the reaction was not as intense due to immediate comments emanating from the US. Joe Biden said the US would not support disproportionate Israeli retaliation against Iran’s missile attacks. Separately, US Federal Reserve chair Jerome Powell indicated subsequent interest rate cuts would not be as steep as the half-a-percentage-point initial drop. The US is not only keeping capital markets reasonably calm through its geopolitical stand and monetary policy, but it has also capped a spike in oil prices by adding impressive inventory. The markets seem to be comfortable with America as globocop and the ability of its economy to avoid a hard landing. Market sentiment has not yet turned risk-off.

Volatility will, however, remain high, with Xionism in the form of China’s stimulus contributing to emerging market portfolio churn. Chinese stocks have notched up their best monthly performance in a month after Beijing unveiled measures to prop up faltering economic growth. India is slowing at a sedate pace after clocking several years of world-beating growth. It will continue to draw capital so long as the risk-on sentiment prevails. The combo of expansionary monetary and fiscal policy in the two biggest economies makes a strong bull case for equities. Particularly since there’s been a flight to security over successive shocks to the global economy over the last four years.

Indian equities are in for a phase of imported volatility over US economic expansion, capital flows into China and energy supply disruptions. The domestic investor has been reasonably sanguine and should be able to dampen the effects of global capital flows, even though there’ll be a bouncy ride ahead for a while. But there’s strong evidence Indian stocks are in a structural bull run. Policy withdrawal across the world is less of a risk than geopolitical conflict that’s peaking. Indian investors will have to come to terms with that.