“So, I would wait for a couple of days for things to settle down,” Patel said, noting that the present crisis differs in several ways from conflicts witnessed over the past two decades. “Now, this kind of crisis particularly what we are seeing today is different from let us say 10, 15, or 20 years. It is more similar to the first Gulf war in 1991 when 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 explained that during the 1991 Gulf War, oil prices had already surged months before the conflict officially began as markets anticipated the buildup of military action. “In case of 1991, the price moved double for three-four months before even the war started because there was a buildup of military assets, there was a coalition force, so market anticipated this,” he said. Once the war actually began, however, the market quickly reassessed the situation. “As soon as the war started, the price started to correct down as market realised that Saddam Hussein is losing this war.”
He believes a similar anticipatory trend has been visible in oil markets this year. “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,” Patel noted. “There is an ETF in US called XLE which is up almost 22% year to date, so that reflect that kind of a money which has moved in that.”
While his base expectation is that the conflict may end relatively quickly, Patel cautioned that predicting the duration of wars is rarely easy. “Now if you ask me, the view is that the war should get over in a week. However, it is difficult to predict the duration of war,” he said. He pointed to the Russia–Ukraine conflict as an example of how initial assumptions can prove incorrect. “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.”
During the early months of that conflict, crude oil prices surged sharply. “When the war accelerated in month of March 2022 and April 22, the oil moved to the almost $120, $130 a barrel,” Patel recalled. Over time, however, markets adjusted as supply chains shifted and production increased. “The Russian barrel reroute from Europe to Asia particularly China and India, market stabilised. OPEC increased the production and what you saw that even the war is still going on, the oil has come down to $60 even last year.”The current situation carries additional risks because of Iran’s strategic location. “Iran sits in the Strait of Hormuz which is 20% of the global oil demand passed through that, 20% of the world’s LNG demand pass through that,” Patel said. He also highlighted emerging disruptions in global LNG supply. “What we are seeing today Qatar which is 18% of the world’s liquefaction capacity, they have announced a force majeure. There is a real disruption is there.” Given these uncertainties, he believes investors should wait for clearer signals before turning bullish. “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 see 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 debate around artificial intelligence and its potential impact on the IT services industry, Patel said the adoption of enterprise AI would still depend heavily on system integrators such as Indian IT companies. “AI without a system integrator or like Infosys, HCL that is not possible to develop in enterprise customers,” he said. While consumer AI tools are widely accessible, enterprise deployment requires deep customization. “You can have AI for retail the way you and I use the ChatGPT or Gemini or few other, but for enterprise to use it they need customised and the customisation will be done by the system integrators like Indian IT companies.”
Patel said the recent sell-off in IT stocks was not driven by immediate earnings concerns but by uncertainty about 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. In the short term, however, AI adoption could actually boost demand for technology services. “In near term, you may see earnings moves upward because there is an accelerated development of the AI across the enterprise,” he said. The bigger question remains whether AI-driven productivity gains could lead to pricing pressure over time. “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 uncertainties, Patel believes the recent correction has made valuations in the sector more reasonable. “The valuation has become reasonable for many of the largecap and you see that rupee has depreciated by almost 2% in the last two days,” he noted, adding that this combination could attract buyers back into IT stocks. “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 said that if geopolitical tensions ease, investors should focus on sectors that have corrected the most. “Where we will bet obviously where the stocks have fallen the maximum,” he said. Energy companies could rebound sharply if supply routes reopen. “If the flow in the Strait of Hormuz restart, if Qatar starts LNG production obviously the one which has fallen the maximum are HP, BP, gail PLNG within the energy pack which we will like it a lot.” He also sees opportunities in high-beta manufacturing stocks. “Some of these high beta stocks like in EMS that have also fallen a lot like Dixon which can be again play on the reversal of memory prices which is again linked to the IT.”
Metals could also offer opportunities, he said, because underlying commodity prices remain relatively strong. “We may go for high beta in metal because mean metal prices are still at an elevated level. The stocks have corrected because of the leverage positions, the fear factor.” Patel also pointed to cement stocks as another potential area of interest as the sector enters its peak demand season. “Cement, now we are entering into peak cement demand season perspective and cement stocks have also corrected in anticipation and because of the higher oil price will lead to the higher petcoke prices and the higher cost for them.”
At the same time, Patel advised caution in a few segments of the market. While he does not believe in completely avoiding markets, he said certain sectors currently lack clear triggers. “There is no absolute nothing,” he remarked, but added that some pharma companies dependent on the US generics market could face competitive pressure. “We probably will avoid some of these pharma companies which are largely dependent on the US generic market because of any kind of competition they will see in some of these key drugs.” He also remains cautious on FMCG stocks due to limited earnings catalysts. “We will avoid FMCG to a certain extent given that there is no incremental earnings positive triggers are there on those one.”
Patel also flagged elevated valuations in parts of the capital goods and defence sectors. “Obviously, in capital goods some of the names are still very expensive,” he said. While defence stocks often rally during geopolitical tensions, he believes the risk-reward in some counters remains unfavourable. “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.”
Overall, Patel’s advice to investors is to remain patient and selective during periods of uncertainty, waiting for clearer signals before making fresh bullish bets in the market.
