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Iran-Israel conflict: Impact on Indian stock market; sectors to watch

Iran-Israel conflict: Impact on Indian stock market; sectors to watch

Following a robust 10 per cent rally in the Nifty since the tariff pause announcement on April 9, 2025, Emkay expects markets to pause.

Amit Mudgill
Amit Mudgill
  • Updated Jun 16, 2025 7:36 AM IST
Iran-Israel conflict: Impact on Indian stock market; sectors to watch bBroader markets are showing signs of froth, with 38 per cent of BSE200 stocks now trading above their 5-year average valuations, compared to just 12 per cent on April 9.

Emkay Global in its latest weekly strategy note highlighted that the escalating Israel-Iran conflict has introduced a new layer of risk to Middle East geopolitics, posing a short-term threat to global markets. For India, the most immediate concern is the surge in crude oil prices, which could negatively impact the current account deficit (CAD), fiscal balance, and inflation. However, Emkay believes this impact will be temporary, citing weak crude fundamentals driven by energy transition trends and sluggish growth in Western economies.

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Foreign portfolio flows could also be affected in the short run, though the brokerage maintained its core bullish stance on Indian equities unless elevated crude prices persist beyond 2–3 months. Sectors vulnerable to sustained high oil prices include oil marketing companies, auto manufacturers, and consumer staples, Emkay Global said. Additionally, select pharmaceutical API producers and chemical firms may face raw material cost pressures, it added.

Stock market may take a breather

Following a robust 10 per cent rally in the Nifty since the tariff pause announcement on April 9, 2025, Emkay expects markets to pause. The rally has eroded valuation comfort, and further escalation in the Middle East could prompt a correction. Nonetheless, Emkay remained optimistic about India’s medium-term prospects, citing a likely earnings rebound supported by aggressive RBI rate cuts and softening commodity prices. The brokerage's sectoral preferences remain unchanged — it continues to favor Discretionary, Technology, and Materials while maintaining an underweight view on Financials and Staples.

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38% stocks above 5-year valuation multiple

The brokerage noted that the recent rally has driven the Nifty’s 1-year forward P/E to 20.9x, just below its long-term average. However, broader markets are showing signs of froth, with 38 per cent of BSE200 stocks now trading above their 5-year average valuations, compared to just 12 per cent on April 9.

Despite the valuation premiums, Emkay argues that Small and Midcaps (SMIDs) remain attractive due to their superior earnings growth, better composition, and improving balance sheets. It sees more potential in SMIDs over the next 1–2 years, particularly as large caps remain weighed down by Financials and Staples.

Fund dlows resilient despite global headwinds

Domestic mutual fund flows continued to strengthen through May, following the market rebound in April and a temporary easing of global risk sentiment. Foreign portfolio investor (FPI) outflows have moderated since March and turned positive in May. However, Emkay cautions that renewed geopolitical tensions could trigger another round of FPI selling, though it remains optimistic about medium-term flows.

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"As the US economy decelerates, emerging markets — particularly India — are likely to benefit from increased capital flows, especially given the cyclical recovery expected in H2 FY26," the firm noted. It added that while current valuations present near-term risks, there are no signs of supply-side stress. IPO and QIP activity remains subdued (₹110 billion in the last month), but block deals have seen a notable uptick (₹40 billion). Promoter selling and pledging activity remain within comfortable levels, Emkay added.

Disclaimer: Business Today provides stock market news for informational purposes only and should not be construed as investment advice. Readers are encouraged to consult with a qualified financial advisor before making any investment decisions.
Published on: Jun 16, 2025 7:36 AM IST
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