Posted by For the past few months, tensions between Iran and US is increasing. Recently US has killed top military general Qasem Soleimani and with this, tension between the two countries has reached to a war like level.
In this post I will describe how does this tension between the two countries affect me as an investor.
To know the background behind US-Iran tension I suggest you first watch this video from Dhruv Rathee. (Turn on captions if you don’t understand Hindi)
So as Dhruv said tension started increasing between the two countries when trump withdrew from the Nuclear deal agreement in 2018 which culminated in US killing Soleimani.
On 8th Jan 2020, Iran retaliated by attacking US airbases in Iraq in which there were no injuries or casualties. They also shot one Ukrainian airliner PS752 mistaking it as US missile.
Now, Iran is forcing Iraq to expel US troops out of its country. In fact, Iraq has even passed a resolution in its parliament for the same. US has threatened Iraq to face severe economic sanctions if it asks US troops to leave.
Now watch this video from Finnovationz.
So, with ongoing tensions with the US, Iran can close the straight of Hormuz, a narrow passage between Persian Gulf and Gulf of Oman through which oil ships pass.
Now coming back to the question how does this all affect me as an investor??
If Iraq persists to expel US forces, then US will impose economic sanctions on Iraq. As Dhruv said, India will not be able to import oil from Iraq because of the sanctions. It will have to Import from other counties which will be expensive.
If Iran closes straight of Hormuz, oil supply in the world will decrease and oil prices will increase.
As India imports expensive oil, its imports will increase and become greater than exports. Whenever Imports > Exports, a country’s current account deficit increases. Whenever current account deficit increases its currency depreciates.
So, Iran-US tension will have two effects on India:
- Oil prices will increase
- Rupee will depreciate against the dollar
Increased oil prices will increase the ATF i.e. Aircraft Turbine Fuel which is the fuel used in aircrafts. This will increase the fuel cost for all airlines including IndiGo. Further, as Rupee depreciates, all of IndiGo’s dollar-denominated expenses like aircraft rentals, maintenance expenses, foreign employee salaries, etc. will also increase. Both this factors will increase costs and decrease Profits, hence share price and hence my returns.
So, this is the way Iran-US tension will affect me as an investor.
Personally, I don’t think that Iraq could force US to withdraw its troops nor do I think that Iran has the capability to close the straight of Hormuz. US is the big guy and it will never let them do this.
Further, even if all of the above scenarios take place and IndiGo’s costs increase in the process, it will be a positive in the long run because IndiGo is the biggest player in the industry and has the lowest cost structure. Other players will die first and when they do IndiGo will have more power.
So, I will continue to hold IndiGo and keep a sharp eye on the ongoing events.
Thanks for reading!