FPJ Analysis: Indian Markets Should Be Ready For 'Black Swans'

FPJ Analysis: Indian Markets Should Be Ready For 'Black Swans'

Outstanding disputes involving state or non-state actors cannot be smugly ignored as they can re-emerge violently.

K C SinghUpdated: Saturday, December 16, 2023, 12:59 AM IST
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FPJ Analysis: Indian Markets Should Be Ready For 'Black Swans' | Image credit: Pixabay (Representative)

When the sensex first scaled 70,000 the writer was invited to Mumbai for a two-day interaction with those running the principal mutual funds, to discuss possible risks from external geopolitical developments. These are, inter alia, the Ukraine war, Gaza imbroglio, the state of the Chinese economy and external fallout from Supreme Court’s Article 370 ruling. The lesson from the October 7 Hamas attack in Israel is that outstanding disputes involving state or non-state actors cannot be smugly ignored as they can re-emerge violently.

For instance, China's strong reaction in 2019 to the Indian abrogation of Article 370 was followed some months later by the Galwan encounter and multiple Chinese intrusions into Indian territory. At Depsang Plains and Demchok they persist. The Supreme Court judgment on the same subject elicited expected howls from Pakistan and a measured but sharp Chinese reaction. The Chinese foreign office spokesperson Mao Ning said that “This is a dispute left from the past between India and Pakistan and it should be properly addressed through peaceful means”. Furthermore, this should be done as per the United Nations Charter, the UN Security Council resolutions and bilateral agreements ie the Simla Agreement, which specifies bilateral and peaceful resolution of Indo-Pak disputes.

And finally that China never recognised India’s unilateral establishment of Ladakh Union Territory because “the western section of the China-India border has always belonged to China”'. Although not as condemnatory as the 2019 Chinese reaction, it has implications. Another Pulwama-like attack by Pakistan, unlikely but hardly improbable, can quickly mutate into joint Sino-Pak defiance.

The Ukraine war has entered a standoff phase due to the inhospitable snowy winter terrain, hampering movement of heavy military vehicles. Ukraine’s unsuccessful counteroffensive and Republican opposition in the US Congress to supplementary military aid have emboldened Russian President Vladimir Putin. He made a high profile visit to Saudi Arabia and the United Arab Emirates, despite the two nations being US partners. The Ukraine war so far, instead of affecting India due to oil price spurt, has benefited due to discounted Russian oil being available. In 2022 Russia was India’s second highest oil supplier, after Kuwait. But the possibility of escalation having receded cannot be assumed.

The threat from the Gaza fighting is more immediate. The Israeli objective of eliminating Hamas’ existential threat may or may not be fully achieved but extremely high civilian casualties and population displacement is upsetting global opinion. The US has finally demanded, during the Israeli visit of US National Security Adviser Jake Sullivan, that Israel end its heavy military operations before the end of 2023. The US also wants Israel to vacate Gaza after the operation ends, though targeted operations by special forces can continue.

Israeli Prime Minister Benjamin Netanyahu has contested this advice. He has adopted a more hawkish posture, apparently to keep his extreme right-wing allies appeased. The danger is that as the civilian misery and toll mounts, the people in Arab countries are getting angrier. Conservative Arab regimes may detest Hamas for its association with the Muslim Brotherhood, but publicly even they support calls for a ceasefire. Under China’s chairmanship of the UNSC a resolution was passed demanding a humanitarian corridor, with the US abstaining.

In the UN General Assembly, a resolution demanding “immediate ceasefire” was passed with 153 yes votes, including that of India, and only 10 no votes. Interestingly two European nations supported it while eight abstained. Clearly global opinion has turned against Israel, after the initial emotional support over widespread death and destruction caused by Hamas.

The risk is that the longer Israel continues the mayhem in Gaza higher the risk of one of Iran’s associates like Hezbollah or the Houthis getting more directly involved in combat. The successful Houthi attack on a Norwegian tanker in the Red Sea if repeated can escalate insurance rates and thus the oil price. That can endanger the Indian bull market.

The other two factors causing global uncertainty are the state of the Chinese economy and Donald Trump’s return to the presidential office in November 2024. European nations fear Trump’s threat of withdrawal from NATO. Combined with his opposition to continued military assistance to Ukraine the thought of an emboldened Putin frightens Europeans.

With preponderance of expert opinion projecting a Chinese economic slowdown, its effect on Chinese conduct abroad needs watching. President Xi Jinping could moderate aggressiveness vis-a-vis China’s maritime and continental neighbours or adopt a more jingoistic approach — the last resort of desperate despots. His outreach to Vietnam last week and to US businesses during his California visit earlier indicate tactical moderation. However the Taiwanese presidential election early next year can trigger a more hawkish posture if, as projected, a pro-independence candidate wins.

Consequently, though India is well placed as one of the few safe destinations for international finance and investment, the atmosphere can rapidly change due to choices that Israel, Russia and China make, as indeed the US Federal Reserve.

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