Since the war in West Asia started on February 27, the 6.31 per cent — over 5,100 points — fall in the benchmark stock market index Sensex has wiped out investors’ wealth, as nervous investors dump stocks to cut their losses, fearing a further crash in the market. The big question is: Should investors sell everything and keep away from the market, or deploy surplus cash when many stocks are available at rock-bottom prices?

Given the heightened geopolitical risks, the sharp rise in crude oil prices, and continued foreign institutional investor outflows, investors should adopt a cautious and disciplined approach in the near term, analysts say. While investors should prioritise capital preservation, maintain strict stop-loss levels, and avoid aggressive leverage amid rising volatility, it may be time for some bargain hunting as well. We explain.

Although the war has unnerved investors with many of them selling stocks, past crash periods have shown that the market always bounced back and more than recovered the losses subsequently. The market has fallen mainly due to the surge in crude oil prices, with Brent crude surging to $115 per barrel. These prices are expected to fall sharply when peace returns to West Asia and the Strait of Hormuz opens up again.

The crash gives an opportunity to do “bottom fishing” (buying securities — such as stocks — that have dropped significantly in price, aiming to profit from their recovery to, or above, their intrinsic value) and accumulate stocks. In such times, it pays to take precautions by hedging leveraged positions. “Sharp falls present a good opportunity for long-term investors with cash to deploy to keep accumulating quality investment ideas,” said Devarsh Vakil, head of Prime Research, HDFC Securities.

The lesson from history is that the impact of geopolitical issues like conflicts on markets do not last long. So, investors have to be patient and avoid knee-jerk reactions — like selling off their portfolio.

“Long-term investors with high-risk appetite can nibble at stocks in these strong themes,” said the research head of a leading broking firm. The crisis will not impact domestic consumption segments like banking and financial services, automobiles, telecom, and cement much; defence and pharmaceuticals will be relatively resilient, he said. While the unknown factor now is how long the conflict will last, the scenario is bound to change.

Satish Kumar, managing director and head, InCred Research Services, said: “Market corrections are a part of the cycle. At this stage, we don’t see significant downside risk left in equities, if clarity emerges. Oil at around $115 per barrel is unlikely to sustain for long, and once prices stabilises, markets should find their footing again. Much of the geopolitical premium is already being priced into commodities and risk assets. If the war does not escalate for extended periods, investors are likely to shift focus back to fundamentals and earnings growth.”

Overall, the broader strategy should remain defensive and balanced, with traders maintaining flexibility to position on both sides until global risk factors begin to stabilise.

India’s oil concern

Crude oil price is a big sentiment mover in India on account of India’s dependence on crude oil import for its energy needs and its impact on current account deficit (CAD). Higher crude imports widen India’s CAD, and raise input costs for industrial and transport sectors. A sharp sell-off in Indian equities clearly underscores how a surge in crude oil prices and geopolitical tensions can weigh on investor sentiment in India and trigger risk-off behaviour in emerging markets.

While the Brent crude prices jumped sharply on Monday to breach $115 per barrel mark, many anticipate that the ongoing conflict between the US, Israel, and Iran may keep the prices at elevated levels. While the attacks on Iranian oil refineries by Israel have been a concern, the attacks by Iran on Gulf countries and on their refineries and also a near closure of Strait of Hormuz have led to a cut in oil production by UAE and Kuwait. There are reports of other countries too going for production cuts amid the supply chain constraints as approximately 20 per cent of global oil supply passes through the Strait of Hormuz.

Apurva Sheth, head of research at SAMCO Securities, said that while crude oil and the benchmark stock market index Nifty50 (NSE) have an inverse relationship, this inverse correlation is significant for India given that the country is a major importer of crude oil. Rising oil prices tend to increase the import bill, put pressure on inflation, and weigh on market sentiment, often translating into a volatile equities market.

“With crude oil potentially moving toward $113-$115, sustained pressure from higher energy prices could continue to weigh on equity markets,” he said.

The ongoing market sell-off could also open a window of opportunity for investors to accumulate mutual fund (MF) units, preferably through staggered lump-sum investments across stages depending on the fund category and volatility. At the same time, investors would do well to continue with their systematic investment plans (SIPs), which can significantly strengthen portfolios when markets eventually rebound.

Market experts caution against the temptation to halt SIPs during periods of sharp volatility. When markets decline, a fixed SIP investment buys a larger number of MF units, while during market upswings the same amount purchases fewer units. Over a certain period, this process helps average out the cost of acquisition and cushions the impact of market volatility. “Stopping SIPs when markets crash is rarely a wise move. Investors who stayed the course in earlier downturns have often reaped substantial gains once markets recovered,” said a fund manager.

Despite the volatility in the market, MF investors have been pumping into MF schemes in the last several months, with SIP inflows alone above Rs 20,000 crore every month.