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The escalation in the US/Israel–Iran conflict has increased global geopolitical uncertainty and raised concerns around energy supply disruptions. Nearly one-fourth of global crude oil trade passes through the Strait of Hormuz, making it a critical chokepoint. While alternative routes exist, spare capacity is limited. If disruptions persist, crude prices could remain elevated in the USD 85–90/bbl range or move higher in a more adverse scenario.
In the near term, global markets are likely to remain volatile and risk averse. Historically, markets recover from geopolitical shocks unless energy supply disruptions are prolonged. Our assessment suggests that expectations of a very short conflict may be optimistic; tensions could continue for at least a few weeks, acting as an overhang on equities. A longer-drawn episode, though lower probability, would add to the already elevated global volatility seen in recent years.
Since last week, Indian markets have also corrected meaningfully. However, the drawdown has been relatively lower compared to markets such as KOSPI and Nikkei 225, which have seen sharper declines. Given India’s underperformance over the past 12 months, relative valuations and lower direct global exposure could make it comparatively attractive if global investors reassess risk across regions. While FPI flows remain negative, the pace of secondary market selling has reduced in recent weeks, which is a constructive early sign.
For India, sustained higher crude prices remain a macro risk, potentially impacting inflation, the current account deficit, the rupee and bond yields. That said, India’s structural strengths — diversified domestic demand, relatively lower export dependence, improving corporate balance sheets and healthy financial sector dynamics — should help sustain its premium valuations despite near-term volatility.
We remain watchful of developments but do not see this episode altering India’s medium-term growth trajectory.
War playbook
Recent experience suggests that episodes of heightened geopolitical uncertainty often trigger knee-jerk reactions in markets. However, in most instances, markets have recovered over the medium term, making such phases appear attractive entry points in hindsight.
We believe that, over time, equity markets are fundamentally driven by earnings growth. While macro disruptions such as wars can create short-term volatility and valuation pressure, sustained earnings growth has historically outweighed these factors.
The Russia-Ukraine War broke out in Feb-2022 and there were dire forecasts that the war would result in severe energy crisis (especially in Europe). This transpired into a global risk-off sentiment which impacted India too with the Nifty50 correcting around ~7% in the immediate aftermath of the war. However, the correction was short-lived and Nifty50 was much higher by the end of the year.
Similarly, the outbreak of the Israel-Hamas War in Oct-2023 resulted in an equity market correction with concerns surrounding a spike in crude oil prices. Here again, market recovered its losses within months and was significantly higher 12 months later.
The Nifty50 is currently flat on an 18-month basis, a relatively infrequent occurrence that has only been seen a handful of times over the last 15 years during periods of significant stress, such as COVID-19, demonetization, or policy paralysis. Interestingly, historical data suggests that investing after such corrections has been fairly rewarding; the average absolute return over the subsequent five-year periods stands at approximately 98%, with even the lowest recorded return reaching a solid 65%.
While every situation has its own dynamics and it is important to remain watchful, if historical patterns hold, the current phase could potentially present a constructive entry opportunity for long-term equity investors.
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