ATK
New Delhi [India], September 28: When you think of stock markets, the first thing that often may come to your mind is how a company's performance impacts its share price. But there is a bigger picture: global and local events play a crucial role too.
As an investor, understanding how political tensions or international relations impact the stock market can give you an upper hand. When stocks are concerned, news is not just information - it is power. The influence of these events can be immediate or gradual, depending on the nature of the event.
So, how do these events really affect stock prices? Let's break it down into five simple points.
1) Impact of trade wars
Trade wars occur when countries impose tariffs or restrictions on each other's imports, often in retaliation for specific policies. One of the notable examples is the US - China trade war. Even though this may appear distant from India, it can still create a ripple effect.
For example, trade war between two main economies can disrupt global supply chains, which indirectly impacts Indian companies. Higher tariffs on raw materials or finished products mean Indian companies may face increased costs to import required goods.
If a major Indian company has to pay more for imported raw materials, it will lead to higher production costs. These enhanced costs may eat into the company's profit margins, causing investors to worry about the future performance of the company, which leads to a decrease in its share price.
Additionally, trade wars can lower demand in international markets, impacting export-oriented Indian companies. As the uncertainty continues, more investors pull their funds out of stocks, leading to a further fall in prices across the market.
2) Impact on political instability
Political instability, whether international or domestic, results in uncertainty, which the stock market usually dislikes. In India, for instance, a national election or changes in government policies can result in considerable market reactions.
If a new government comes into power and announces policies that could enhance corporate taxes or implement stricter regulations, companies might witness lower profitability. Investors prefer stability, and any sign of unpredictability can result in a sell-off.
Moreover, global political instability, such as unrest in a neighbouring country, can result in panic in Indian markets. For instance, if there are conflicts between India and another country, particularly one that India shares a large trading relationship with, stock prices might fall because of fears of disrupted business ties. Until the situation normalises, the uncertainty keeps the stock market, and especially share prices of sensitive sectors, on edge.
3) Currency fluctuations
Geopolitical events often cause fluctuations in currency exchange rates, which can significantly affect Indian companies. If, for example, there is a conflict or political tension that causes the rupee to weaken against the U.S. dollar, companies that rely on imported raw materials could face higher costs.
Many commodities, including metals and oil, are traded in dollars, so a weak rupee makes these imports more expensive. This would hurt the profit margins of these companies, as they might not be able to fully pass on these higher costs to consumers.
Additionally, companies with significant international operations may see their overseas revenues shrink when converted into rupees. Investors, anticipating lower profits due to currency fluctuations, may sell off stocks, driving down share prices in response.
4) Global oil prices
India is heavily dependent on crude oil imports, and geopolitical events that affect oil-producing regions can send oil prices soaring. For instance, conflicts in the Middle East, which is a key supplier of crude oil to India, often lead to disruptions in oil supplies, driving up global oil prices.
When oil prices rise, the costs of fuel, transportation, and production for Indian industries increase. To illustrate, for a company like Tata Steel that uses significant amounts of energy in production, higher oil prices can result in escalated costs. This erodes profit margins, making the company less attractive to investors.
As a result, Tata Steel share prices could drop, reflecting these concerns. On a broader scale, rising oil prices increase inflationary pressures in India, which can lead to slower economic growth, negatively affecting the overall stock market.
5) Investor sentiment and market reactions
Investor sentiment is a key driver of stock market movements. Geopolitical events, whether they are actual conflicts or even the threat of conflict, create uncertainty, which can quickly impact investor confidence. For instance, when tensions rise between two countries or there are rumours of impending sanctions, investors often become risk averse.
This cautious mindset prompts many to sell shares to avoid potential losses, leading to a dip in stock prices. Even companies that may not be directly involved in the conflict can see their stock prices fall simply because of broader market trends.
Investors may choose to move their funds into safer assets, causing the market to become more volatile. In such situations, share prices become highly sensitive to news, with even minor updates on the geopolitical front causing significant price swings.
Ending note
Geopolitical events are not just background noise for the stock market - they are powerful forces that can shift market trends in a matter of hours or days. From trade wars and political instability to currency fluctuations and rising oil prices, every international event creates ripples in the stock market.
As an investor, it is crucial to stay updated on these developments. By understanding how geopolitical events impact stock prices, you can make more informed decisions, ensuring your investments are aligned with the global picture.
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