“So, I will wait for a few days for things to settle down,” Patel said, noting that the current crisis is different in several ways from the conflicts seen over the past two decades. “Now, this kind of crisis, especially what we see today, is different from 10, 15 or 20 years ago. It’s similar to the first Gulf War in 1991 when Iran and the coalition forces or something like that, but it’s not as bad as what we saw in 1973 when the Arab embargo on oil exports was imposed and in that case we went down to almost 0% to 0%.”
Patel explained that during the 1991 Gulf War, oil prices spiked months before the war officially began as markets anticipated military action. “In the case of 1991, the price doubled three to four months before the start of the war, because there were military assets built, coalition forces were there, so the market anticipated that,” he said. Once the war actually began, however, the market quickly reassessed the situation. “When the war started, prices corrected because the market realized that Saddam Hussein was losing the war.”
He believes that the same predictable trend has been observed in the oil markets this year. “Oil started moving already in the first or second week of January. Even if you see a lot of passive money has gone into oil and oil-related stocks,” Patel noted. “There’s an ETF in the US called XLE that’s up about 22% year to date, so that reflects the kind of money that’s moved into it.”
While his basic expectation is that the conflict will end relatively quickly, Patel cautioned that predicting the duration of conflicts is rarely easy. “Now if you ask me, the idea is that the war should end in a week, but it is difficult to predict the duration of the war,” he said. He cited the Russia-Ukraine conflict as an example of how early assumptions can be proven wrong. “When the war in Ukraine started, many of us believed that the war would last maybe a month at most, but we are in the fifth year of the war.”
In the first months of the conflict, oil prices rose sharply. “When the conflict escalated in March 2022 and April 22, oil prices went to around $120, $130 a barrel,” Patel noted. However, over time, markets adjusted as supply chains changed and production increased. “Russian barrels go from Europe to Asia, especially China and India, the market is stable. OPEC has increased production and what you see is that even the war is going on, even last year the price of oil dropped to 60 dollars.”
The current situation also carries additional risks due to Iran’s strategic location. “Iran is located in the Strait of Hormuz, through which 20% of the world’s oil demand passes, and 20% of the world’s LNG demand passes through it,” Patel said. He also highlighted emerging bottlenecks in global LNG supply. “What we are seeing today is Qatar, which has 18% of the world’s liquid capacity, they have declared a force majeure. There is a real chaos here.” Given this uncertainty, he believes investors should wait for clear signals before improving. “Maybe we want to wait a few days to see how things go and then take a better look at the market when we see the regime collapse or the attacks from Iran diminish day by day and then we can make another constructive call on the market.” Returning to the discussion of artificial intelligence and its potential impact will still depend on the penetration of AI into the AI industry. System integrators such as Indian IT companies. “AI is not possible without a system integrator or the likes of Infosys, HCL to grow into enterprise customers.” While consumer AI tools are widely accessible, enterprise implementation requires deep customization. “You can have AI for retail like you and I use ChatGPT or Gemini or a few others, but for enterprise to use it they need customization and customization will be done by system integrators like Indian IT companies.”
Patel said the recent sell-off in IT stocks was not due to immediate earnings concerns but due to uncertainty over long-term profitability. “Sales two or three weeks ago aren’t related to near-term revenue, it’s what the revenue path will be five years from now,” he explained. In the short term, however, the adoption of AI could actually boost demand for technology services. “In the near term, you may see revenue increase as there is rapid advancement of AI across the enterprise,” he said. The big question remains whether AI-driven productivity gains can lead to price pressures over time. “What will happen to earnings four or five years down the line, will there be price inflation given the gains of similar products delivered by AI, so that’s the main question or concern among investors.”
Despite this uncertainty, Patel believes the recent correction has made valuations in the sector more reasonable. “Valuation has been favorable for most large caps and you see the rupee has depreciated by almost 2% in the last two days,” he noted, adding that this combination could attract buyers back to IT stocks. “So, we’re going to see some kind of buying going on in IT stocks given that they’re relatively safe in this turbulent period that you’re seeing.”
Looking ahead, Patel said that if geopolitical tensions ease, investors should focus on sectors that have recovered the most. “Where we’re obviously going to bet is where stocks have fallen the most,” he said. Energy companies can recover quickly if supply routes are reopened. “If the flow in the Strait of Hormuz resumes, if Qatar starts producing LNG, obviously the one that has fallen the most in the energy package is HP, BP, Gail PLNG, which we would like very much.” He also sees opportunities in high-beta yield stocks. “Some of these high-beta stocks like Dixon in EMS have fallen a lot which could then play into changing memory prices which are then related to IT.”
Metals could also present opportunities, he said, because commodity prices are relatively strong. “We may go for higher beta in metal as metal prices are still at high levels. Stocks have corrected due to leveraged positions, fear factor.” Patel also pointed to cement stocks as another potential area of interest as the sector enters peak demand season. “Cement, now we are entering the peak season for cement demand and cement stocks have also been adjusted in anticipation of higher oil prices and higher petcoke prices and higher costs for them.”
Meanwhile, Patel advised caution in several market segments. While he doesn’t believe in completely stopping the markets, he said some sectors don’t have clear triggers at the moment. “There are no absolutes,” he said, but added that some drug companies depending on the U.S. generics market could face competitive pressure. “We’re probably going to avoid some of these drug companies that are largely dependent on the generic US market because of any competition they’re going to see in these key drugs.” He also remains cautious on FMCG stocks due to limited earnings catalysts. “We will avoid FMCG to some extent given that there are no positive drivers in terms of incremental revenue.”
Patel also pointed to higher valuations in the capital goods and defense sectors. “Obviously, some names in capitalism are still expensive,” he said. While defense stocks often rally during geopolitical tensions, he believes the risk-reward remains disproportionate in some numbers. “When the conflict begins that defense stocks are moving very large, but some defense names are still at very high levels, we will avoid it.”
Overall, Patel’s advice to investors is to remain patient and selective in times of uncertainty, waiting for clear signals before making fresh price bets on the market.
