'Another proxy war': What stock analysts say on Iran-Israel conflict

Stock analysts tracking the Iran-Israel tensions said the oil price situation has taken an unexpected turn and that there is limited scope for earnings, fiscal or monetary surprise now. Higher geopolitical risks demand higher equity risk premium, they said as they worry over expensive valuations on the bulk of Nifty components and the broader market as a whole.

Foreign brokerage Nomura said risk appetite is likely to take a dent on rising geopolitical tensions in the Middle East. While previous geopolitical events typically caused only temporary market volatility, it advocated some caution given the strong rally in equities amid unprecedented policy uncertainty – suggesting a potential for de-risking and profit-taking.

"Asian stocks could be particularly vulnerable through two channels: sustained higher oil prices impacting oil-importing countries; and risk-off sentiment affecting high-beta markets more severely. However, barring a more severe and prolonged escalation in Middle East tensions, the broader market backdrop remains supportive," it said.

Kotak Institutional Equities said the emergence of another regional conflict and the evanescence of the UN and Europe (in its erstwhile colonies) and the US as global peacekeepers in the erstwhile “rule of law” world order highlight the increased geopolitical risks in the new “rule of might” world order. 

"We have long argued for a higher cost of capital to factor in higher geopolitical risks, higher probability of regional conflicts between regional powers and more frequent disruptions to global investment and trade," Kotak said.

This brokerage said current Iran-Israel conflict could easily descend into another proxy war between economic and military superpowers and prolonged disruption to crude oil supply with disruption to the movement of oil and gas tankers in the critical Strait of Hormuz.

"We expect the markets to pause for breath after a frenetic 10 per cent Nifty rally since the tariff pause announcement on 9-Apr-25. Valuation comfort has largely eroded and escalation of the Middle-East conflict could trigger a sell-off. From a medium-term perspective, though, we are not worried. The crude price spike is likely to be transient and India’s fundamentals are otherwise looking up," it said.

This brokerage is optimistic on discretionary, technology, and materials, and underweight on financials and staples.