Impact of AI and Oil Prices on Indian Markets: An Investor's Perspective

Recent developments involving escalating tensions in Iran, fluctuations in oil prices, and the swift adoption of artificial intelligence are complicating the investment landscape for stakeholders globally. Prashant Mishra, founder and CEO of Agnam Advisors, emphasizes the importance of maintaining discipline and diversification, advocating for an approach focused on structural long-term trends rather than immediate reactions to the latest news.

Mishra noted that while the conflict in Iran could have implications for energy markets, the comparisons to historical oil shocks, such as the 1973 Arab oil embargo or the ongoing Russia-Ukraine war, might be exaggerated. He remarked, “This is a serious development, but not a reason to panic.” The Strait of Hormuz is crucial as it serves as a conduit for nearly 20% of the world's oil trade, meaning any disturbances in this area could lead to significant spikes in crude oil prices.

However, Mishra asserts that today's circumstances differ fundamentally from the past. Modern energy infrastructures, including U.S. shale production and strategic petroleum reserves, alongside a deceleration in oil demand growth—partly due to the rise of electric vehicles—offer stronger buffers than in earlier decades. Nonetheless, he pointed out that India continues to feel the strain, as approximately 85% of its crude oil is imported. Consequently, even modest increases in oil prices can significantly impact inflation, the value of the Indian rupee, and the country's current account balance.

Mishra advises investors to discern temporary market fluctuations from enduring structural transformations. The critical question for investors, he suggested, should be whether any incident alters the earning capacities of businesses over the next three to five years. He indicated that geopolitical incidents tend to induce short-term sentiment shifts which markets eventually adjust to, while structural changes can have a lasting effect on industries and business practices.

Artificial intelligence, specifically, represents a pivotal structural alteration. Mishra pointed out that the Indian IT services sector is likely undergoing a fundamental transformation as AI tools automate functions such as coding, testing, and documentation that were traditionally carried out by junior engineers in large teams. “This is a transformation rather than an extinction event,” he explained, expressing confidence that large IT firms will likely adapt effectively by incorporating AI into their operational models, while specialised AI-driven companies could emerge as new industry leaders.

This shift is already affecting employment patterns. There has been a noticeable slowdown in hiring across various tech sectors, creating trepidation for young professionals entering the job market. Mishra acknowledged the validity of these concerns but advised against succumbing to fear. He encouraged the younger workforce to prioritise continuous learning, understanding of business dynamics, communication skills, and the ability to collaborate with AI tools rather than attempting to compete with them.

Mishra also cautioned that a slowdown in tech hiring might eventually influence housing demands in cities like Bengaluru, Hyderabad, and Pune, which have historically thrived due to strong employment growth in the IT sector. While he does not predict a drastic decline in real estate prices, he anticipates that the rate of property price appreciation may slow in markets heavily reliant on tech employment.

Given the current unpredictable economic climate, Mishra recommends investors focus on sectors that demonstrate robust cash flows, such as healthcare, renewable energy, infrastructure, and financial services. He also suggests having a mix of high-quality debt instruments, selective real estate investments, and an international diversification strategy. Gold remains a vital hedge against geopolitical risks, inflation, and currency fluctuations, and allocating about 10% to 15% of investment portfolios to gold can be prudent.

“Investors who build enduring wealth do not necessarily predict events accurately,” Mishra summarised. “They are the ones who practise sensible asset allocation, periodically rebalance their portfolios, and remain concentrated on long-term objectives.”