Indian Economy Faces Uncertain Future Amid Prolonged Iran Conflict

Market Outlook: Impact of Middle East Tensions on Indian Economy

Axis Securities PMS, led by Naveen Kulkarni, Chief Investment Officer, has provided insights on the potential impact of Middle East tensions on the Indian economy.

Q4 Earnings Expectations: Q4 earnings are expected to be good due to the possibility of inventory gains across the system. However, prolonged war could lead to growth challenges for the Indian economy in the future.

Market Volatility: The US-Iran developments have kept volatility elevated, with instances of bottom fishing in the equity markets. The volatility index indicates instability in the market, making stability in equity markets unlikely at present.

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Crude Oil Prices: It is unlikely that crude oil prices will fall below US$60 per barrel anytime soon due to ongoing uncertainty in the market. Freight costs and insurance costs have increased significantly, suggesting potential supply-side issues.

Market Rally: Once Middle East tensions ease, a strong rally in equity markets is highly likely, driven by robust domestic fundamentals. The current challenges to the Indian market include higher crude prices, gas availability, raw materials, and shipping routes, which will be addressed once tensions ease.

Q4 Earnings Impact: The near-term earnings are likely to be good and could surprise positively, but prolonged war could lead to growth challenges for the Indian economy in the future.

Press Note 3 Relaxation: The relaxation of Press Note 3 is a long-term positive, which will help bring more investments to India. This is an additional step to attract foreign capital, aligning with the Indian government's focus on foreign investment.

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Global Supply Chains: The liberalisation of Press Note 3 will strengthen India's role in global supply chains, with investments in manufacturing sectors likely to rise. However, this is a long-term structural theme that will take time to play out.

IT Sector Guidance: The Indian IT sector is unlikely to see an upward revision in earnings guidance due to significant uncertainties related to AI and changing industry structure. However, sector valuations have become reasonable, and dollar appreciation provides some near-term cushion.