Geopolitical uncertainty clouds outlook, but defence story remains strong: Ashi Anand

The current environment is highly fluid, with market direction shifting almost daily in response to news flow around the US-Iran conflict. Speaking to ET Now, Ashi Anand from Founder & CEO, IME Capital noted that the situation remains unpredictable, especially with simultaneous reports of troop movements in the Middle East and the ever-changing stance of US leadership.

“In terms of just reading the situation, it remains extremely fluid and extremely dynamic. We are really shifting day-to-day in terms of a shift from positive to negative sentiment. Clearly, today is an up day on the back of various indications that Trump may be willing to pull out a bit early. But that said, there is also news about troops being sent into the Middle East. And with Trump, we have gotten used to the fact that views can change on a dime.”

Given this backdrop, the market’s fundamental outlook remains closely tied to how the geopolitical situation evolves. While recent corrections have brought valuations to more reasonable levels, the sustainability of any rally remains dependent on clarity emerging from the conflict. Anand suggested that if markets see further declines in the near term, it could provide an opportunity for gradual accumulation, considering the extent of the fall from previous highs.

“So, in terms of the fundamental market outlook, it remains intrinsically linked to the resolution of the US-Iran conflict. If we do see a pullback over the month of April, I think markets have already fallen quite significantly. Actually, it may make a lot of sense for investors to start accumulating a certain amount in the context of the fact that markets have fallen from their highs.”

However, he also cautioned that the risks associated with the US-Iran conflict are significant, particularly due to the strategic importance of the Strait of Hormuz, which has major implications for global trade and energy flows. Without a clear resolution, markets could remain vulnerable to further downside.

“But that said, it is important to understand that US-Iran as a conflict is quite unique, especially in the context of the Strait of Hormuz and the very significant global economic implications this particular strait has. So, within that context, before we turn more bullish on the markets or start seeing markets in terms of the next move up, we do need a resolution here and if this conflict continues to prolong, further downsides from the market cannot be ruled out.”

Amid this uncertainty, the defence sector continues to stand out as a structurally strong theme, supported not just by current geopolitical tensions but also by India’s long-term push towards self-reliance in defence production. Anand highlighted that the attractiveness of the sector lies in its long-term growth potential driven by indigenisation efforts and reduced dependence on imports.“So, defence is a space that we like and what makes defence really quite attractive more than just the near-term momentum that you are clearly seeing on the back of just US-Iran conflicts and other geopolitical concerns is this longer-term strategic necessity of India to actually reduce its import dependence in defence.”

India’s position as one of the largest importers of defence equipment has accelerated policy initiatives aimed at boosting domestic manufacturing, creating a multi-year growth opportunity for local companies.

“We continue to be the second largest importer of arms and armaments in the world. In changing geopolitical scenarios, self-sufficiency on defence, especially critical equipment, is exceedingly important and this whole indigenisation of defence that started three or four years ago is continuing to gain momentum and therefore, what does make the space quite attractive is the fact that you really do see the potential for multi-years of structural growth.”

At the same time, he emphasised that investing in defence requires careful stock selection due to the nature of the business, which involves long project cycles, dependency on large contracts, and execution challenges.

“That said, when you are playing defence it is very important to understand and evaluate companies on a stock-specific basis. What does tend to happen is a number of these companies are working on what is often very long-range projects and these projects have a very high dependence on whether you are winning a particular project or not, delivery schedules, and we have seen this in the case of HAL, there can sometimes be delays in the supply chain, etc.”

Anand further explained that their investment approach avoids companies with high dependence on single large projects, given the binary risks involved, and instead focuses on more diversified businesses.

“We are very mindful of the risk associated with dependence on certain large projects for a number of these counters. There are quite a lot of make-or-break opportunities and just as investors managing third-party money, we prefer to stay away from 0-1 kind of bets.”

Within the private sector, he pointed out a divide between larger diversified companies, where defence is still a smaller part of the business, and smaller, more focused players that come with higher risks due to their early-stage nature.

“When it does come to the private sector within defence, you can actually break this up into two core segments. One, there are larger companies with other businesses that have started to see defence increase as a percentage of their overall revenues. Now, what is happening out here is that while defence is growing and growing quite rapidly, the outlook on the company continues to be quite driven by the overall outlook on the larger business.”

“When it comes to some of the smaller companies which may be more direct players, out here some of these companies are still very nascent. They have not been around for as long and the level of risk associated with some of these companies seems to be on the higher side.”

In this context, the preference remains for companies with strong execution track records and diversified order books, with Bharat Electronics highlighted as a key example.

“At IME, what we focus on is some of the more diversified larger names. Bharat Electronics is clearly a company that we do like. What is very interesting is the fact that there is a high level of diversification. They have been executing quite consistently and they are direct beneficiaries of a number of the import embargos or a number of the lists that the government is really focusing on.”

Overall, while markets may continue to react to short-term geopolitical cues, sectors like defence offer a clearer long-term growth narrative. However, investors are likely to remain cautious and selective until greater clarity emerges on the global front.