Stay invested through geopolitical stress; wars have not historically resulted in sustained equity underperformance: Axis MF

Escalating hostilities between the United States, Israel and Iran may trigger near-term volatility across asset classes, but they are unlikely to meaningfully alter India’s long-term investment trajectory, according to a report by Axis Asset Management Company Limited. The fund house said that while wars and geopolitical conflicts typically cause short-term turbulence, they have historically not resulted in sustained equity underperformance, particularly when tensions remain regional. Indian markets, it noted, have repeatedly demonstrated resilience by absorbing external shocks, briefly repricing risk and then reverting to domestic fundamentals. Axis MF identified crude oil as the primary transmission channel through which global conflict affects India. The country imports more than 80% of its crude requirements, making it sensitive to instability in the Middle East. A sustained rise in oil prices can increase input costs, widen the current account deficit and feed inflation, with equity markets reacting quickly, particularly in oil-sensitive sectors such as aviation, paints, cement and chemicals. The report highlighted the Strait of Hormuz as a key risk factor. The strait accounts for about 20% of global crude oil flows and nearly 30% of LNG trade, with 50% or more of India’s energy imports transiting through it. Even partial or temporary disruptions could affect India’s energy security, inflation trajectory and external balances. However, Axis MF noted that oil shocks alone have not derailed Indian equities unless they persist long enough to damage growth and monetary stability. During the Russia–Ukraine war in 2022, for example, Brent crude surged above $100 per barrel, yet after an initial sell-off, the Nifty 50 ended the year in positive territory. On the currency front, the fund house said periods of geopolitical stress typically strengthen the US dollar, putting pressure on emerging-market currencies including the rupee. Nevertheless, INR weakness has usually been orderly rather than disruptive. India’s sizeable foreign-exchange reserves and stronger external balance sheet act as buffers, while the current account and fiscal deficits remain under control. Though the rupee may see volatility due to foreign institutional investor flows, past episodes such as the 2013 taper tantrum, the 2020 pandemic shock and the 2022 Ukraine conflict show that currency moves have rarely translated into persistent equity declines. The Reserve Bank of India plays a critical stabilising role during global shocks, the report added. The central bank has historically looked through temporary, geopolitically driven inflation spikes and focused on core trends and growth durability, while using liquidity management to smooth volatility and reinforce financial stability. Over the past 15 years, Axis MF noted that events ranging from the Arab Spring and the Crimea conflict to the Uri surgical strikes, the Balakot airstrikes, the Russia–Ukraine war and the Israel–Hamas conflict were marked by short-term drawdowns followed by recovery. The consistent pattern, it said, is that conflict-driven declines tend to be shallow and temporary, with longer-term returns dictated by earnings growth, liquidity and domestic demand. Markets price duration and economic impact rather than emotion, the fund house said, adding that once it becomes clear that supply disruptions are manageable and growth is not structurally impaired, risk premiums typically compress. For long-term investors, the report concluded, maintaining discipline and staying invested through periods of geopolitical stress has historically proven more effective than reacting to short-term uncertainty. Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.