On October 7th, Hamas, a designated terrorist group in the Gaza Strip, fired thousands of rockets into the Israeli territory taking a toll on 1,300+ lives and leading to hefty infrastructural damage. This started a series of cascading events leading to war between Israel and Hamas. While this year the act of cartographic and terrorist aggression was different and more brutal in nature, the long-drawn-out conflict has been a point of geopolitical contention for more than 70 years. Herein we explore the history and intricacies of this conflict, and what are its impacts on the global and Indian economy, and its spillover effects on the financial markets.
Background of the Israel-Hamas Conflict & Palestine
The Israel-Palestine conflict has deep historical roots, originating in the late 19th and early 20th centuries when Jewish Zionists sought to establish a homeland in Palestine. Conflicts like the Six-Day War in 1967, further shaped the territorial boundaries and power dynamics in the region, with Israel occupying the West Bank, Gaza Strip, and East Jerusalem. Despite numerous attempts at peace negotiations, a comprehensive and lasting resolution remains challenging. Today the region is marred with persistent violence, disputes over borders and sovereignty, and the establishment of settlements and an ever-looming refugee crisis, as highlighted by the UN.
Immediate Impact
Speaking of the economic impacts, the recent war has already had a noticeable short-term effect, especially on crude oil prices. Since the start of the war, crude oil prices have surged 5%. Companies reliant on crude oil have already suffered in the initial days of the war. This means further increases could make the crude prices touch the three-digit mark and bring considerable consequences for the Indian economy.
The impact of rising crude oil prices on the Indian economy includes a potential trade deficit due to increased oil import costs, inflation triggered by higher fuel prices, a potential increase in the fiscal deficit, and pressure on the Indian rupee.
Experts speculate that the ongoing conflict may not lead to a major disruption in oil supplies, potentially limiting the impact on India. This is because it’s not the first time such a conflict has happened. The region has been a hotbed of such violence before leading to insulation steps by companies and governments over the years.
However, there could be a worst-case scenario if other countries join the war, potentially resulting in a spike in crude oil prices and subsequent market selling pressure. But, OPEC nations are anticipated to monitor oil prices to prevent them from surpassing 10 to 12%.
India’s Exposure to Geopolitical Risks
Regarding the Israel-India trade impact, Israel's significant imports of refined petroleum products from India might result in Indian companies facing higher premiums and shipping costs. Although there hasn't been a notable increase yet, intensifying conflicts may lead to weekly rises in these charges. India's imports from Israel encompass various products, including machinery, pearls, diamonds, and other precious stones, with the potential for the conflict to cause supply-side issues and lead to a possible rupee depreciation, which may shift the currency to the Rs 83 mark.
Response of Indian Markets
Indian stock markets have largely shown resilience amid the recent conflict, remaining stable without witnessing any panicked sell-offs. However, the focus has shifted to Indian companies operating in or connected to Israel, as the Middle East tensions escalate.
Shares of Sun Pharma might be affected as its Israel-based subsidiary Taro Pharmaceuticals voiced concerns about potential disruptions to its business. Other major Pharma companies such as Dr Reddy’s, Lupin, and Torrent Pharma also have exposure to Israel through exports.
Adani Ports, which runs the Haifa port in Israel, experienced a nearly 5% drop in stock value on October 9. The Adani-led group assured stakeholders of their preparedness with a business continuity plan, emphasising Haifa's relatively small 3% contribution to APSEZ's total cargo volume.
Tata Consultancy Services (TCS) has significant projects in Israel, with over 1,000 employees in the country. The company is closely monitoring the safety of its employees currently stranded in Israel.
Oil marketing companies like Indian Oil Corporation (IOC), Hindustan Petroleum Corporation, and Bharat Petroleum Corporation Limited are under scrutiny due to the possibility of disruptions in crude oil supply from the Middle East. The crisis may trigger a surge in crude prices, impacting related stocks including ONGC, Oil India, Mahanagar Gas, and Reliance Industries.
The increased crude oil prices might unfavourably affect the paint sector, as companies such as Asian Paints, Berger Paints, IndiGo Paints, and Kansai Nerolac Paints heavily rely on crude oil derivatives for their products. Several companies with operations in Israel, including NMDC, Kalyan Jewellers, Infosys, Tech Mahindra, and Wipro, could also witness market performance impacts.
Conversely, Archean Chemicals, a notable player in the chemical industry, could benefit from an anticipated rise in bromine prices due to the projected slowdown in bromine production in the Dead Sea region, which borders Israel and Jordan. This situation could potentially boost the stock of other bromine producers, including Archean Chemicals, according to IIFL Securities.
Dulling Shine of Diamond
Surat, Gujarat, is reeling from the effects of reduced diamond prices and a lack of raw materials due to the Israel-Palestine conflict. Israel plays a significant role in India's diamond sector, with India exporting USD 1,279.76 million worth of diamonds to Israel in the last fiscal year, while Israel's raw diamond exports totalled USD 1,782.80 million.
As per an Indian Express report, the Ukraine-Russia conflict and the Israel-Palestine conflict have led to a combined job loss for 3,000 diamond workers. Production in diamond units has reduced to 10 hours a day, with some offering a two-day workweek. The scarcity of diamonds has led small units in Surat to declare an early Diwali vacation. The situation has even led diamond magnates to approach the Ministry of Commerce and Minister Piyush Goyal to seek some relief.
Defence Exports to Benefit
A Nuvama report highlights that India's defence exports stand to benefit from the ongoing conflict in the region, potentially providing growth opportunities for local companies. It’s worth noting that ties between India and Israel have strengthened over the years, with defence imports from Israel ranking second only to Russia. Notably, India's defence sector has witnessed substantial growth and expansion in exports, reaching an all-time high of Rs 16,000 crore in FY23.
Defence stocks like Hindustan Aeronautics, Bharat Dynamics, and Bharat Electronics have charted out substantial returns for investors in the last two financial years owing to Make in India. Despite the potential benefits for some companies exporting equipment, those relying on Israeli partnerships may face supply chain disruptions and delays due to Israel's focus on domestic defence requirements during the conflict.
The Gist
The Israel-Hamas conflict is a long-drawn one and is probably here to stay and intensify, this underlines the need for diversification across sectors and regions, mitigating risks. However, there is no need for panic. Except for the immediate market reactions, historical resilience suggests long-term stability. The sectors to watch out for include diamonds, chemicals, paints and defence. While there are risks, there are opportunities as well. Conclusively, Israel-Gaza tensions are a reminder to investors to maintain perspective and prudence with a diversified portfolio in this globalised world.
留言