Investors are being urged to exercise caution amid heightened geopolitical uncertainty, with Equirus Securities’ Maulik Patel advising a period of observation before making significant market moves. The call for patience comes as global markets react to escalating tensions and fluctuating oil prices, reminiscent of past crises but with unique characteristics, according to Patel.
Speaking to ET Now, Patel suggested allowing “a couple of days for things to settle down,” noting the current situation differs from conflicts experienced in recent decades. “Now, this kind of crisis… what we are seeing today is different from, let us say, 10, 15, or 20 years [ago]. It is more similar to the first Gulf War in 1991 when [it was] between Iran and the coalition forces or so, but it is not that bad like what we saw in 1973 when there was an Arab embargo on the oil export to the western nations and in that case the price moved by almost 300%.”
Patel highlighted the anticipatory nature of oil price movements during the 1991 Gulf War, observing that prices doubled over several months prior to the conflict’s outbreak due to the buildup of military assets and the formation of a coalition force. He noted that once the war commenced, the market quickly adjusted its assessment, with prices correcting downwards as it became clear that Saddam Hussein was losing the conflict.
A similar trend has been visible in oil markets this year, Patel stated. “Oil started moving up already in the first or second week of January. Even if you look at a lot of passive money has moved to the oil and oil related stocks,” he said, pointing to the performance of the XLE ETF in the US, which has risen nearly 22% year-to-date as evidence of this shift in investment.
While anticipating a relatively swift resolution to the current conflict, Patel cautioned against predicting the duration of wars, citing the Russia-Ukraine conflict as an example of initial assumptions proving inaccurate. “When the Ukraine war started, most of us believed that the war will last probably one month at max. But we are in the fifth year of the war.” He recalled that crude oil prices surged sharply in the early months of the Ukraine war, reaching $120 to $130 a barrel in March and April 2022, but subsequently stabilized as Russian oil was rerouted to Asia, particularly China and India and OPEC increased production.
The current situation is complicated by Iran’s strategic location in the Strait of Hormuz, through which 20% of global oil and LNG demand passes. Patel too pointed to a force majeure declared by Qatar, which accounts for 18% of the world’s liquefaction capacity, as a further disruption to global LNG supply. Given these uncertainties, Patel reiterated his advice for investors to wait for clearer signals before adopting a bullish stance.
“Probably we would like to wait for a couple of days how things are moving up and then taken a bullish view on market once we spot the regime is collapsed or the attacks which are happening from the Iran getting reduced day by day and then we can make another constructive call on the market.”
Turning to the technology sector, Patel emphasized the crucial role of system integrators, such as Indian IT companies, in the successful adoption of enterprise artificial intelligence. “AI without a system integrator or like Infosys, HCL that is not possible to develop in enterprise customers,” he stated, differentiating enterprise AI deployment from readily available consumer AI tools like ChatGPT and Gemini, which require extensive customization.
Patel attributed the recent sell-off in IT stocks not to immediate earnings concerns, but to uncertainty surrounding long-term profitability. “The sell off two-three weeks back is not related to the near-term earnings, it is that what would be the earning trajectory five years down the line,” he explained. However, he suggested that AI adoption could provide a short-term boost to technology services earnings, while acknowledging concerns about potential pricing pressure from AI-driven productivity gains in the longer term.
“What will happen to the earnings four or five year down the line, will there be a deflation in the pricing given that kind of a productivity gain delivered by the AI, so that is what the real question or the concerns among the investors.”
Despite these concerns, Patel noted that the recent correction has made valuations in the IT sector more reasonable, particularly given the rupee’s depreciation. “So, we will see some kind of buying emerge at in IT stocks given that they are relatively safe in this disruption period what you see.”
Looking ahead, Patel suggested that investors should focus on sectors that have experienced the most significant corrections if geopolitical tensions subside. He identified energy companies, particularly HP, BP, and Gail PLNG, as potential beneficiaries of a reopening of supply routes through the Strait of Hormuz and a resumption of LNG production by Qatar. He also highlighted high-beta manufacturing stocks, such as Dixon, as potential plays on a reversal of memory prices. Metals and cement stocks were also flagged as potential opportunities, given relatively strong commodity prices and the onset of peak demand season for cement.
Patel advised caution in certain segments, recommending avoidance of US generics-dependent pharmaceutical companies due to competitive pressures and fast-moving consumer goods (FMCG) stocks due to a lack of clear earnings catalysts. He also cautioned against overvalued capital goods and defense stocks, noting that while defense stocks often rally during geopolitical tensions, valuations in some cases remain elevated.
“Whenever the conflict start that the defence stocks make a very big move, but some of the defence names the multiples are still at a very-very elevated level, we will avoid that.”
