Market stability is based on predictability, confidence, and advantageous economic conditions. Geopolitical events, by definition, add uncertainty to the global economic system, upsetting the equilibrium on which stable markets rely. These incidents instil dread in investors, often causing significant changes in financial markets as risk perception rises.
The ongoing conflict in the Middle East exemplifies how geopolitical events can undermine market stability on a regional and international scale. Let us examine the three critical elements that help assess how geopolitical events affect market stability, in the context of the present disturbance.
Investor sentiment
Markets react to the impression of risk, which is frequently increased during times of international turmoil. The present dispute prompted a flight of capital from riskier assets, particularly in emerging nations such as India. During geopolitical crises, investors typically take a ‘risk-off’ attitude, transferring their investments from stocks to safer assets such as gold, US treasury bonds, and other low-risk instruments. The result was a drop in Indian stock indices as Foreign Institutional Investors (FIIs) withdrew investment.
Volatility
Geopolitical tensions cause higher market volatility. One of the most immediate and far-reaching impacts of the Israel-Hamas conflict was the rise in world oil prices. The Middle East is a key oil production hub, and any disturbance in the region raises concerns about supply shortages. Although Israel is not a big oil producer, its proximity to vital shipping routes, particularly the Suez Canal, has raised fears about potential disruptions in global energy supplies.
For India, which imports the vast bulk of its crude oil, changes in world oil prices have serious consequences for market stability. Rising oil prices drive up input costs for Indian businesses, particularly in energy-intensive industries such as transportation, manufacturing, and aviation. These higher costs might reduce business profitability and cause inflationary pressures, further affecting the stock market.
Sector-specific impact
Geopolitical developments have varying effects on different industries. For example, tensions in oil-producing regions might cause energy prices to rise, yet political instability can increase defence spending, helping enterprises in that industry.
India’s defence industry has seen increasing interest as a result of its collaboration with Israel on defence technology and equipment. In contrast, the agriculture and technology sectors, which rely on trade with Israel, have faced concern owing to anticipated trade interruptions. Furthermore, sectors susceptible to energy prices, such as transportation and manufacturing, saw growing expenses when global oil prices changed.
Broader implications
Volatility in emerging markets - Emerging economies, such as India, are frequently more vulnerable to global geopolitical events than industrialised ones. This is because they rely significantly on foreign capital inflows, and when this is withdrawn due to upheavals it increases volatility and puts downward pressure on stock prices.
Global trade and supply chain disruptions - Geopolitical conflicts can affect global economic flows, especially if they occur in countries that are critical to global supply chains. The Israel-Hamas conflict has sparked fears about trade interruptions in industries such as agriculture and technology, which can spike manufacturing costs, create shortage in goods and slower economic growth.
Currency volatility - Geopolitical events frequently cause currency volatility as investors shift their funds to more stable currencies. This has an influence on global markets, particularly in nations such as India, where a weaker rupee can raise import costs and cause inflationary pressures.
Opportunities for investors - Market corrections during periods of volatility might provide purchasing chances for high-quality equities that are temporarily undervalued. For example, now sectors such as defence and energy infrastructure may gain from higher government spending, providing investors with long-term growth opportunities.
Geopolitical events are an inherent part of the global financial scene, and their impact on market stability cannot be overstated. Being aware and sensitive to global changes allows investors to better manage their portfolios during times of turmoil.