Russia-Ukraine Conflict: Lessons from History in Shaping the War's Outcome

Market Analysis: Middle East Conflict Impact on Global Markets

Key Findings:

• The MSCI India equity index has fallen by 1.86% in local currency terms and 2.5% in dollar terms as of March 5, despite the ongoing Middle East conflict.
• Historical analysis suggests that the Sensex has delivered positive returns 12 months after the start of almost every Middle East war, providing a powerful incentive for investors to remain calm.
• However, history also carries warnings, with Middle East conflicts being more adverse for the Indian exchange rate than conflicts where India was directly involved.

Asset Class Impact:

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• Oil prices have spiked, with the possibility of reaching $200 a barrel, due to supply disruptions and concerns about the impact on global energy markets.
• Gas prices have already increased, with the potential to trigger further shocks to confidence in markets.
• Metal prices are also at risk, with sustained Gulf conflict potentially destabilizing global energy markets and affecting business sentiment.

Sectoral Impact:

• IT firms may experience a slowdown in discretionary spending and project delays in the region.
• The energy sector is expected to be significantly impacted, with Goldman Sachs predicting a 2% hit to India Inc.'s earnings from every 20% rise in the price of Brent Crude.
• Other sectors, such as shipping and logistics, may also be affected by the conflict.

Regional Market Performance:

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• The MSCI USA has fallen by 0.67% in this month to March 5, while MSCI UAE is down 6.4% and Saudi Arabia is up 0.6%.
• Korea is down 12.7% this month, but still up 36% year to date.
• Israel has been the star performer, with its benchmark index up 3.9% this month and 38.5% from a year ago.

Investment Strategy:

• Investors should remain cautious and consider increasing exposure to equities, especially in the energy sector.
• A prolonged conflict could lead to a deeper impact on markets, with investors bracing for a 2% hit to India Inc.'s earnings from every 20% rise in the price of Brent Crude.
• A detailed list of beaten-down stocks that merit attention as the war risk premium spikes is available.