How to prepare your stock portfolio for war

Projectiles fly through the sky in central Israel as a siren sounds a warning of incoming missiles fired from Iran towards Israel, Oct. 1, 2024. (File Photo: AP)
Projectiles fly through the sky in central Israel as a siren sounds a warning of incoming missiles fired from Iran towards Israel, Oct. 1, 2024. (File Photo: AP)

Summary

  • Understand market risks and sector vulnerabilities during global conflicts.

Last week, the Israel-Gaza war escalated as Iran officially entered the fray, launching 180 missiles at Israel. This opened the door to potential retaliatory strikes from Israel, with Lebanon already feeling the heat.

Until now, Indian financial markets were largely unaffected by the wars in Ukraine and Gaza. But last week marked a turning point, as Indian benchmark indices dropped over four trading sessions. Global oil markets, which had been relatively stable for over a year, began to show signs of distress, with WTI (Western Texas Intermediate) crude oil jumping 11.5% in just one week.

What changes if Iran enters the war?

Veteran oil and gas traders know that navigating the energy markets requires more than just understanding supply-demand dynamics, chart reading, and statistical analysis. Successful trading also demands an in-depth grasp of geopolitics and intelligence gathering, both human (Hum-Int) and open-source (Os-Int). Inevitably, an element of “guesstimation" comes into play.

Iran is a heavyweight in the global oil and gas landscape, holding the third-largest oil reserves (approximately 12% of the world’s total) and the second-largest natural gas reserves. Its oil is light and sweet, and its natural gas is of high calorific value.

However, with Israel threatening to target Iran’s oil and gas infrastructure—including wells, refineries, and tankers—energy markets are understandably on edge about potential disruptions. A similar situation is unfolding with Ukraine’s attacks on Russian energy infrastructure, further straining global supply chains.

Adding to the tension is the hurricane season in the U.S., which runs from June to November. Offshore drilling and transportation infrastructure are often shut down as a precaution, and recent damage from Hurricane Helene in Florida underscores this vulnerability. With more potential hurricanes looming, the energy markets are facing a perfect storm of risks.

Gulf of Hormuz

Oil and gas traders keep a close eye on the Strait of Hormuz, a critical passage for global energy exports. This narrow gulf is a conduit for nearly one-third of the world’s natural gas and a quarter of its oil exports. Any disruption here would send shockwaves through global supply chains.

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Iran, in response to attacks on its oil and gas infrastructure, has been known to attempt to block this crucial passage, using warships, marine mines, and threats of bombardment. It has even blocked shipping lanes by parking empty tankers at the narrowest points of the gulf.

In the past, the US has deployed naval escorts and minesweepers to ensure the safe passage of oil tankers during such blockades. These measures, along with rising insurance costs, significantly drive up fuel prices—even without shots being fired. The costs will spike, if only temporarily.

Your investments and the fog of war

Initially, markets may feel shell-shocked, as we saw on 30 September when they opened with a gap down. This reaction could continue, depending on how news from the Gulf unfolds.

However, markets are inherently resilient and tend to recover over time. In 2012, while initial reports of ISIS atrocities sent the market into free fall, within weeks it was back to business as usual. While some sectors were affected in the long term, for every sector that struggled, others emerged stronger, and the market continued its upward trend.

For more such analysis, read Profit Pulse.

So, remain optimistic. Wars in the Gulf typically aren’t long-lasting, as Iran cannot afford to block the Strait of Hormuz for extended periods without triggering international intervention. Additionally, such actions would halt Iran’s own energy exports, cutting off a critical revenue stream.

In my previous articles (dated 17 September 2024, and 21 August 2024), I discussed how energy exporters maintain exports during conflicts to fund their war efforts. Even if Iran attempts to prolong the conflict, it will still need petro dollars to sustain its war machine. Therefore, any spikes in oil prices are likely to be temporary, lasting weeks or months rather than multiple quarters.

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Please refer to the disclosure below this article before making any trading decisions in the energy markets.

The Weak links

A chain is only as strong as its weakest link, and your equity portfolio may have some weak spots as well. These typically fall into the following categories (though the list is not exhaustive):

Banks: Wars are inflationary and reduce savings, as people tend to hold onto cash. This weakens sentiment for banking and financial stocks, which hold a significant 32.60% weight in the Nifty-50, potentially dragging the market for a while.

Merchandise exporters: Companies exporting goods and services to Iran and neighbouring countries may see subdued stock performance during hostilities. Markets may factor in potential receivable write-offs, affecting stock prices.

Petro-based raw material importers: Companies using petroleum by-products like adhesives, paints, dyes, plastics, and polymers could face rising raw material costs, temporarily hitting profits.

Fertilizers: Nitrogen-based fertilizer prices may rise with energy costs. While temporary spikes are manageable, a prolonged shortage or gas price inflation can raise farming costs, leading to higher food prices—arguably the worst kind of inflation, since people can’t stop eating.

Transportation and logistics: If fuel prices rise beyond the short term, stocks in these sectors could take a hit until fuel costs normalize. Once prices ease, the pressure should lift.

While it’s natural to feel anxious during times of conflict, history shows that holding on—and even buying more—can be a better strategy. Having traded these markets since 1986, I’ve found conflicts like Gulf War I & II, 9/11, and others to offer strong buying opportunities.

Remember—ships are safest in the harbour, but that’s not what they’re built for!

Note: This article primarily relies on data from the U.S. Energy Information Administration and Wikipedia. The purpose is to share interesting charts, data points, and thought-provoking insights, and it should not be considered investment advice. If you're considering an investment, please consult your advisor. This article is strictly for educational purposes.

Vijay L Bhambwani is the author of India’s first official commodities trading guide. He designs statistical and behavioral trading models for his family-owned proprietary trading outfit. Based in South Mumbai, Vijay has been trading markets since 1986. You can follow him on Twitter at @vijaybhambwani or on his video blog at www.youtube.com/vijaybhambwani.

Disclosure: The writer and his proprietary trading organization hold short sale positions in crude oil and natural gas derivatives contracts discussed here. He has a vested interest in the bearish viewpoints expressed in this article.

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