The Risk That Refuses To Die

For months, markets have hoped that the conflict in Iran would move towards a resolution.

Negotiations took place.

Tensions eased.

Markets hoped for a breakthrough.

Then negotiations failed.

Tensions returned.

The cycle repeated.

The investor is waiting for one risk after another to disappear.

The Iran war will end.

Oil will come down.

The rupee will stabilise.

FII selling will ease.

But just when one risk begins to fade, another appears.

What Comes Next?

Suppose the Iran war ends.

Oil falls.

The rupee stabilises.

FIIs return.

Would the uncertainty disappear?

Probably not.

The markets rarely move from uncertainty to certainty.

They simply move from one uncertainty to another.

Before the Iran risk has disappeared, El Niño has arrived.

Skymet is warning of a 70% probability of drought, while the latest global forecasts point to a potentially strong El Niño later this year.

And if the monsoon disappoints, the concerns change:

Food inflation.

Rural demand.

Agricultural output.

RBI policy.

Now combine that with elevated oil.

A weak monsoon can push food prices higher.

Higher crude can push imported inflation higher.

A weaker rupee makes imported oil even more expensive.

FII selling can add further pressure.

Individually, these risks may be manageable.

Together, they can become much bigger.

This is not simply an addition of risks.

It is a multiplier effect.

The Risk That Refuses To Die

But perhaps the bigger lesson isn't about Iran or El Niño.

There is always another uncertainty waiting.

If it isn't Iran, it may be El Niño.

If it isn't El Niño, it could be inflation.

Interest rates.

A global recession.

Valuations.

Or something that nobody is even talking about today.

One risk disappears. Another takes its place.

That is how markets work.

The objective, therefore, is not to build a portfolio for a world without risks.

That world does not exist.

The objective is to build a portfolio that can survive a world where the risks keep changing.

Because the next risk is always around the corner.

We don't know its name yet.

The risk may change.

The risk may move.

The risk may take a different form.

But the risk refuses to die.

And that is the uncertainty we must learn to live with.

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Pravinkumar Padalkar | ARN-179619 | Defensive Investments