'Economically, nobody is winning this war'

'Markets never fully lose hope. But an important shift could come if the Strait remains closed -- moving from high prices to no prices.'

Two months into the West Asia war, Ben Powell, chief investment strategist for Asia-Pacific at BlackRock, tells Puneet Wadhwa/ Business Standard in an interview in New Delhi that the three most important factors shaping his investment decisions over the next six months are earnings, interest rates, and the inflation trajectory.

Inflation, he says, is particularly critical, as it influences both rates and market dynamics.

Strait of Hormuz blockade impact

How do you assess the last two months of the West Asia conflict? What is priced in, and what could surprise markets?

Looking ahead, the key question is duration.

The Strait of Hormuz remains closed, and we effectively have a double blockade, with both Iran and the US restricting the flow of energy.

Many other critical goods and commodities are also affected. So this is a broader supply issue, though energy remains central.

Markets, in my view, remain reasonably optimistic that a resolution can come soon.

We do not know when, but there are encouraging signs. It is complicated and will take time, with ups and downs.

That said, economically, nobody is winning this war -- it is a problem for the entire world, including Iran.

This creates a shared incentive for normalisation and the reopening of the Strait.

However, we should remain uncertain about the timing -- it could take days, weeks or longer.

Inflation and interest rate risks

When do you think markets might start losing hope of a resolution?

Markets never fully lose hope. But an important shift could come if the Strait remains closed -- moving from high prices to no prices.

Commodities are physical. There is a real risk of moving from expensive supply to outright shortages, where you simply cannot get the product.

We are already seeing early stress in markets such as jet fuel and diesel.

This is leading to early signs of demand destruction -- for example, people choosing not to fly because ticket prices are too high due to fuel costs.

If we move from high prices to shortages, demand destruction will intensify, creating a severe economic shock, especially for energy-importing economies.

Would that be the point when markets start to weaken?

Potentially. Right now, markets remain relatively optimistic. But the real issue is inflation.

Energy feeds into everything -- every sector depends on it.

If prices rise, costs get passed on to consumers. This creates inflationary pressure across the economy.

One must understand the sequence: first the impact on energy markets, followed by spillover into fixed income through inflation, and finally higher interest rates becoming a headwind for equities.

However, equities are also driven by earnings.

As we have seen in the US, even with rising rates, strong earnings -- especially in recent years -- have supported markets.

So interest rates matter, but they are not the only factor.

Global market outlook shift

Does the United Arab Emirates' (UAE's) decision to exit Organization of the Petroleum Exporting Countries complicate oil markets?

Not particularly. The UAE has been signalling this for some time, and it is not unprecedented -- Qatar exited in 2019.

More broadly, this reflects a global trend towards fragmentation.

Many international institutions are under pressure, and countries are increasingly focused on self-reliance.

The UAE's move fits into this broader shift towards independent policymaking and prioritising national interests.

AI-driven earnings boom

Are equity investors becoming more risk-averse as the war drags on?

Globally, not really. We are in a very unusual market environment.

On one hand, there are clear headwinds -- geopolitics, inflation, and uncertainty around interest rates.

But these are being outweighed by the massive artificial intelligence (AI)-driven earnings boom.

It is concentrated in a few companies, which creates some discomfort, but the scale of earnings growth continues to surprise on the upside.

So despite risks, investors remain constructive because they do not want to miss what could be the defining investment theme of our time.

India valuation and energy concerns

What about India -- are investors turning cautious here?

India's situation is more nuanced.

Structurally, we remain very positive.

The long-term story -- demographics, reforms, digitalisation, and improving efficiency -- remains intact.

However, in the short term, there are challenges.

About 18 months ago, valuations were quite high.

Since then, the global AI boom has shifted investor focus to other markets such as South Korea, Taiwan, and parts of China.

Rising energy prices are a headwind for India as a major energy importer.

While some short-term capital has flowed out, it does not change the long-term conviction.

Foreign direct investment remains strong.

Do you expect a fuel price hike in India?

We remain structurally bullish on India despite headwinds.

However, in the short term, energy price uncertainty is a key risk.

Markets are watching for potential fuel price hikes and their ripple effects on the economy.

If there is a resolution in the Strait, it could be a strong positive trigger for Indian equities, especially given that valuations have corrected significantly.

What could change your positive long-term view on India?

A decline in productivity growth.

If reforms slow, efficiency declines or productivity gains weaken, that would be a concern.

But as long as India continues improving productivity, especially through technology, we remain constructive.

Within Asia, which markets do you prefer?

AI-linked markets stand out, particularly Taiwan and South Korea.

We also look at indirect beneficiaries such as commodity exporters, since AI demand drives the need for electricity and materials such as copper.

What are the three key data points you are tracking over the next three to six months that will shape your investment decisions?

The three most important factors would be earnings, interest rates, and the inflation trajectory.

Inflation is particularly critical, as it influences both rates and market dynamics.

For India, rank the following from most concerning to least -- earnings not coming through, valuation woes, rupee under pressure, and oil and its impact on the economy.

Crude oil prices remain the biggest concern, as they affect not only India but the entire world, especially Asia.

Second is the rupee, which is an important factor for foreign investors.

On valuations, we are comfortable after the correction seen in recent months.

Lastly, earnings -- there are still attractive investment opportunities in the market, though investors need to be selective.

If the energy situation improves, it would be a significant positive for both the global and Indian economy.

Feature Presentation: Ashish Narsale/Rediff