Prolonged War in the Middle East Less Likely Than a Peace Deal

The general concern around India has been high valuations, both on an absolute and relative basis Jyotivardhan Jaipuria Founder and MD of Valentis Advisors

- Ram Sahgal

The US involvement in Iran could queer the pitch for financial markets only if Iran or its proxies decide to escalate by targeting US bases or choking the Strait of Hormuz. That's something markets will be closely watching over the next few days as it could impact energy prices, with a fifth of global demand of 100 million barrels per day passing through the waterway. However, given the current global supply-demand dynamic, crude might not sustain at higher levels for too long, a plus for energy-dependent markets like India, believes Jyotivardhan Jaipuria, founder and managing director of Valentis Advisors. Edited excerpts:

The US has joined Israel's war on Iran. What does this bode for financial markets, including in India?

With the US joining the war on Iran as we speak, focus on the markets will shift to events in the Middle East over the next few days. There are two possibilities which could play out now. First is the positive scenario where, post the US strikes, peace efforts move quickly, and this marks the beginning of the end of this phase of the war. The negative scenario is if Iran responds by hitting some US targets, which leads to a more prolonged war, especially if other countries get involved.

Currently, we think the second scenario is a lower probability, but something we have to keep a close watch on. Having said that, history shows that the impact of wars on stock markets is not long-lasting, and markets tend to bounce back quickly. The reason there is concern about the Middle East crisis is the price of oil, especially if energy infrastructure is hit in the war or more importantly, if the movement of vessels across the Strait of Hormuz is impacted. However, if we look at the current demand-supply balance, it is unlikely that oil can be sustained at high prices for very long. Hence, any surge in oil prices may impact markets in the short term, but investors should use that as a buying opportunity.