IRAN WAR BONUS: Ruchir Sharma on Market Reaction to Us-Israel War

0:00Ruchir Sharma:This currently ranks as not even among the top 30 oil price increases following a geopolitical conflict, right? So it's just not that big so far. I think we'd need the price of oil to go up by another 10-20 % at the very least before this begins to have a really major impact. So this has been more a catalyst, you know, for a reshuffle in the markets, a degrossing move, rather than something more fundamental. Something more fundamental will happen if I begin to see some of the regional markets begin to panic. And that would tell me that, yeah, this conflict is spinning out of control. And then you can look back and say that, yeah, even the oil and the gas markets are underreacting.

0:45Ruchir Sharma:But so far, I don't have any such view.

0:50Wilfred Frost:Welcome to the Master Investor Podcast with me, Wilfred Frost, for this quick bonus episode with Roshir Sharma, the founder and CIO of Breakout Capital. Our full episode with Roshir drops on Monday, so make sure you hit follow or subscribe if you haven't done so already. But in this bonus episode, here are Roshir Sharma's views on the Iran war and what it means for markets. The Master Investor Podcast is sponsored by BNY Investments, LSEG and Interactive Brokers. Please do remember the views expressed in this podcast are for general information purposes only. Nothing in the podcast constitutes a financial promotion, investment advice or a personal recommendation.

1:36Wilfred Frost:More on that in the show notes. Rashid, let's talk about your market views on the situation now in the Middle East. I guess the first question I have on that is how long the current level of conflict, the current level of then market disruption has to persist to really derail the global economy?

1:58Ruchir Sharma:Well, historically, if you look at the transmission mechanism, Wilf, it's really been through one route, right, which is the price of oil. And I think that so far, the increase in the price of oil has not been severe enough, which is that, in fact, if you look at the historic oil price increases, this currently ranks as not even among the top 30 oil price increases following a geopolitical conflict, right? So it's just not that big so far. I think we'd need the price of oil to go up by another 10, 20 percent at the very least before this begins to have a really major impact. Now, What we've already seen in markets is that this has been the trigger for what is referred to in financial terms as degrossing, which is that across the world, the winning strategies of the past few weeks and months have been reversed quite abruptly.

2:56Ruchir Sharma:And the ones which were actually underperforming have held up. So on an overall basis, the markets themselves haven't done that much except for this massive reshuffle, which has taken place. At the margin, of course, the oil producing companies and countries are doing relatively better. But so far, this has been a trigger for a big reshuffle that's happened with hedge funds and other leveraged people degrossing their books. But this has not been a major event so far. And I wrote this piece, I remember last year for the Financial Times as part of my column, that possibly the most important market to look at just now is the Israeli market.

3:40Ruchir Sharma:And what struck me in the summer of last year was that despite all these negative geopolitical headlines, the fact is that the Israeli stock market, ever since the conflict began in October 2023, the Israeli stock market ended up being about the best performing stock market in the world since then, right up until even July last year when the first direct skirmish took place with Iran. And even now, that stock market seems to be holding up pretty well. So that's telling you in some ways that this is a very unfortunate event that's going on. But at least so far, the market's perception is that Israel in general is prevailing.

4:31Ruchir Sharma:And it's also possible that the markets are reading the fact that with Iran fading as any threat in the region, that eventually that region could even emerge more stable.

4:46Wilfred Frost:That's an interesting kind of perspective on it. Do you think that oil and gas markets are underreacting then, given the scale of what we've seen?

4:56Ruchir Sharma:No, but as I said, if I look at what's happening in some of the other markets, it's sort of consistent, right? As I said, if you look at the Israeli market, you look at the regional Gulf markets as to how they're behaving, it's relatively calm. So I'd say that the view is that the headlines are very scary. There's always the potential that this completely spins out of control because of what's been unleashed. There is a lot of debate about what exactly is the end objective here. But so far, at least, I'd say that the markets have been relatively calm. You know, at least if we look at the markets at the epicenter of this.

5:39Ruchir Sharma:And if anything, what this has done is that this has been a trigger for a degrossing because some of the markets that have been very badly hit have been markets like Korea or even Brazil. And these markets had gone up a lot. And there's no reason why Brazil should get hit because of this crisis. Because Korea, you can still understand that it's a big oil importer and there's some sensitivity out there. But Brazil's getting hit just because it had gone up a lot in the last few weeks, just like Korea. And Korea, there was a lot of leverage in the system there. the retail investors were punting. So it's that kind of reshuffle which has happened.

6:18Ruchir Sharma:So this has been more a catalyst, you know, for a reshuffle in the markets, a degrossing move, rather than something more fundamental. Something more fundamental will happen if I begin to see some of the regional markets begin to panic. And that would tell me that, yeah, this conflict is spinning out of control. And then you can like look back and say that, even the oil and the gas markets are underreacting. But so far, I don't have any such view.

6:44Wilfred Frost:And if that were to happen, Rashid, just hypothetically, would the classic analysis be, because so much of what comes out of Iran and goes through the Straits goes to Asia, would the classic analysis be an energy importer in Asia will suffer and an energy exporter elsewhere should actually benefit? So in that sense, Brazil should benefit, for example?

7:09Ruchir Sharma:Yeah, I'd say that on a relative basis. But if you end up getting a big shock, you know, for the global economy that the price of oil gets to$100 or so a barrel, I think that brings everyone down. I don't, you know, see any places to hide in that environment, especially because remember, in the build up to this, we've seen everything go up a lot, including gold and silver, you know, the classic safe havens, so to speak. And we saw that on Monday, that when the markets did have a bit of a sell-off, even gold did not hold up in that environment. So I think that if the price of oil gets to$100 or so, I don't see any place to hide except cash in that environment.

7:54Ruchir Sharma:And yes, there'll be relative outperformers and underperformers that the Latin American markets should relatively do better. But in that environment, I think it's a problem for global markets in general. but everything's going to be down.

8:07Wilfred Frost:And what about for the US as a net energy exporter these days? If we do get$100 on oil, it's bad for them?

8:15Ruchir Sharma:Yes, it's bad. Undoubtedly, it's less bad, right? So I think that's what we even sort of seeing play out in the last few days as well, which is that the US was really underperforming the international markets significantly. And that's a big change. And it's one of the big themes that we'll speak about. that how this very fad of American exceptionalism was fading, that was really declining, where at one point in time, people thought the only place in the world to invest in was America. The rest of the world didn't matter. But America had started to underperform quite meaningfully over the past year or so.

8:54Ruchir Sharma:But in the last few days, the American markets have held up better compared to the international markets. And a part of their visa, as I said, is this degrossing move where people were very tactically long that they have cut back on those positions. And part of it also reflects this oil order, which you referred to, which is that the US is not that dependent on imported energy anymore and is a net exporter. Whereas the European and Asian nations are much more vulnerable to an energy shock. And so they've suffered more.

9:28Wilfred Frost:And just finally on the Iran issue, Rashi, what does it all mean for China? are still quite reliant on importing fossil fuels, but have they successfully built up their reserves?

9:39Ruchir Sharma:Yeah, their reserves are relatively okay, but at the end of the day, I think that China is sort of, I'm sure behind the scenes engaged in quite, you know, trying to calm the situation down because it's really not in their interest in terms of what's happening. And I think that it's also notable that China has not offered Iran any major support after appearing like their ally for a time. So I think that China realizes that it is vulnerable to any sustained oil price shock. Its interest is very much in seeing the situation come to an end. And I think it's implicitly taken a bet that there's no point really supporting Iran here.

10:24Ruchir Sharma:And the best way for this geopolitical conflict to end is really if, you know, it may not be a very palatable outcome to them, but if at all the US and Israel prevail out here and the conflict can come to some sort of an end, I think that China would possibly be seen in its commercial interest because it really sees this about oil, and I don't think it sees Iran as an ally worth fighting for.

10:56Wilfred Frost:That was Rashear Sharma from Breakout Capital talking to us about his views on the market's reaction so far to the Iran war. Don't forget our full conversation with Rashear drops on Monday. Make sure to hit follow or subscribe if you haven't done so already. Thanks so much for listening. The Master Investor Podcast is sponsored by BNY Investments, LSEG and Interactive Brokers. Please do remember the views expressed in this podcast are for general information purposes only. Nothing in the podcast constitutes a financial promotion, investment advice or a personal recommendation. More on that in the show notes.

11:39Wilfred Frost:This podcast is produced by Paradigm Productions and Master Investor Limited in association with Birdline Media. If you've enjoyed the show, please do subscribe on YouTube or click follow on your podcast platform and you'll be automatically notified each time a new episode drops.

12:09Thank you.