Indian Stock Markets Rise 1% on Optimism Over US-Iran Diplomatic Developments

Global Equity Markets Surge on US-Iran Agreement Hopes

Reports of a possible agreement between the US and Iran to end the conflict in West Asia sent global equity markets surging on Wednesday, with Indian markets joining the risk-on move. However, investors remain wary that the relief may be fragile, with valuations, earnings visibility, and geopolitical uncertainty still in play.

Indian benchmarks Nifty 50 and S&P BSE Sensex shot up an identical 1.2% from the previous day to end at 24,330.95 and 77,958.52, respectively. The broader market also gained, with both the Nifty Smallcap 250 and Nifty Midcap 100 surging 1.8%, comfortably outperforming large caps.

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Asian markets closed on a strong note as well. The surge in these markets is likely to stay sensitive to headlines, with any chatter around a potential peace deal, whether progress or setbacks, could trigger swift reactions as investors recalibrate to the news flow.

According to Sorbh Gupta, head of equity at Bajaj Finserv Asset Management Limited, large caps are currently trading below their long-term average valuations, while mid- and small caps offer stronger growth comfort. Among sectoral indices, the Nifty MidSmall IT & Telecom index led gains, rising over 3%, followed by the Nifty PSU Bank index, up 2.8%.

With Brent crude falling over 7%, sectors sensitive to fuel costs saw strong gains, with aviation stocks such as InterGlobe Aviation emerging among the top performers on the Nifty 50. Rahul Singh, CIO-equities at Tata Mutual Fund, believes Indian markets are currently reflecting a mix of improving valuations and lingering uncertainties.

"The risks in the market have not gone away, but valuations are more palatable," Singh said. Nifty's forward P/E has come down from 23x to 19x since 2024. Singh added that the valuation premium of Indian markets has come down relatively compared to other emerging markets, and so has the premium of mid and small-caps compared to large-caps.

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Provisional data from the BSE showed that foreign institutional investors (FIIs) were net sellers to the tune of ₹5,835 crore on Wednesday, while domestic institutional investors (DIIs) net purchased equities worth ₹6,837 crore. According to a May strategy report by Motilal Oswal Financial Services, once the war dust settles, there is a high likelihood of a better FII flow environment.

Even an abatement in outflows will be taken positively by the market, while a full-blown positive flow can lead to sharper rallies. Singh of Tata Mutual Fund said volatility is likely to persist, and investors should be prepared for continued swings. Key factors to watch, he said, include the trajectory of earnings growth, particularly whether it sustains in the mid-teens range, as well as external variables such as crude prices, global growth, and geopolitical challenges.

"In this environment, a staggered approach to investing with a longer-term horizon appears prudent, rather than trying to time the market," he said.