The escalation of conflict in the Persian Gulf can pose a risk to the global economy and markets by a spike in oil prices and difficulty in movement of goods through the Strait of Hormuz.
However, from the actions of the past few days, it is apparent that Israel and the US have control over the airspace and there seems to be extensive damage to Iran’s ability to counter-attack. So it may not be easy to disrupt the sea-traffic movement in the Gulf.
Moreover, given the sluggish global growth, the supply-demand situation for oil is not very tight. In the short term, oil prices can be moderated by release of oil from the strategic reserve of the US. As long as oil stays within the $65-85 range, India can manage the volatility. Only if it spikes to extreme levels like $100–$120, it can create problems.
The global liquidity, currency and interest rate scenario continues to be benign and financial conditions are getting increasingly benign.
On a stand alone basis, India is doing fine. Government spending has accelerated again, and there are green shoots in private sector investment. Rural demand seems to be picking up. Overall, earnings are coming through, liquidity is abundant, policy remains growth-focused and there is a sustained flow of domestic savings to the equity markets.
Indian financial markets have seen many such geopolitical events in the past 30 years and markets have emerged stronger. There will be short term volatility due to external factors, but that will not change the India story. Trust Mutual Fund remains bullish on domestic sectors including industrials, financials, selected consumer discretionary and healthcare.
Any knee-jerk reaction in the markets should be used as an opportunity to buy.