Highlights
- Indian stock markets has witnessed a decline of over Rs 34 lakh crore.
- Investors who have been waiting for valuations to normalise may now look at stocks that are trading at lower Price-to-Earnings multiples.
- But it is not clear how long this conflict will last.
Following the West Asia conflict, investors’ wealth in the Indian stock markets has witnessed a decline of over Rs 34 lakh crore. Nevertheless, both retail and institutional investors remain unconcerned about the current downturn in the stock market.
Retail investors, in fact view the current market correction as a significant buying opportunity, particularly within the small-cap sector. Institutional investors, on the other hand, who generally tend to be risk-averse, prefer to focus their attention on large-cap stocks. Investors who have been waiting for valuations to normalise may now look at stocks that are trading at lower Price-to-Earnings (P/E) multiples.
But it is not clear how long this war will last.
So, which sectors should be avoided? Where do buying opportunities exist? Are there any concerning signs for Indian markets in the long term?
Amid the ongoing conflict and turmoil in West Asia, one factor has emerged as the focal point — energy supply.
The Iran-Israel-US conflict has disrupted the flow of crude oil and LNG (Liquefied Natural Gas) through the Strait of Hormuz. Approximately 20 million barrels of oil pass through this critical route daily, accounting for 20 per cent of global petroleum consumption and 27 per cent of the global seaborne oil trade. India is directly exposed to the impact of this situation. In the first quarter of CY25, India accounted for approximately 15 per cent of the total crude oil exports passing through this strait; India imports 85 per cent of its crude oil requirements.
Oil prices surged by more than 5 per cent on Wednesday after Iran threatened to attack several energy installations in West Asia. Brent futures rose by USD 5.26 to USD 108.66 per barrel.
“The impact on balance of payment (BoP) is relatively straightforward, with a USD10/barrel change in crude price and related change in natural gas price impacting India’s CAD by USD 20 billion (0.5 per cent of GDP) on an annualised basis,” says a Kotak report, quoted by ET.
What investors need to do?
Over the pas three weeks, share prices have fallen due to the conflict, as concerns regarding oil and gas supplies — and their pricess –have nervous investors.
While, a section of fund managers belive that the investors should stick to buying large-cap stocks, whereas, on the other hand, retail investors feel that this is a good time to purchase stocks that have witnessed the sharpest decline in prices, and are looking towards small-cap stocks.
Kotak Institutional Equities and DSP Investment Managers have stated in their reports that the market’s reaction is likely disproportionate to the actual economic damage, premising this on the assumption that the conflict will be resolved with in a few weeks.
Fears regarding credit costs for MSMEs are exaggerated, and overall, there are no long-term concerns for Indian markets. The long-term earnings trajectory remains intact, as the Nifty 50 is currently trading at 19 times its FY27E EPS (Earnings Per Share), with EPS growth projected at 16 per cent in FY27 and 15 per cent in FY28.
Banks, which account for approximately 35 per cent of the Nifty 50 index, have declined by 7 per cent over the past 15 days. During this period, these stocks have fallen by an average of 8.1 per cent — making it one of the most severely affected sectors. The market fears that MSME companies reliant on LPG and natural gas may face margin pressure and credit-related challenges, while elevated energy costs could adversely impact borrowers’ cash flows, potentially leading to a rise in NPAs. Consequently, this situation has presented a buying opportunity in battered banking stocks such as IndusInd, IDFC First Bank, and Bandhan Bank.
Which strategy should investors adopt?
Kotak Institutional Equities advises investors to reduce their exposure to the cement, consumer goods, and ‘narrative’ stocks — which are currently trading at high valuations — and to buy into financial sector stocks whose prices have declined due to unfounded concerns. Within the large-cap segment, stocks with a low price-to-book value — including OMC shares — appear attractive. However, if you are investing in small-cap stocks, it would be prudent to prioritise quality — specifically, stocks that may appear expensive in terms of price-to-book value but feature a significant presence of institutional investors.
(Disclaimer: The above article is meant for informational purposes only, and should not be considered as any investment advice. ET NOW DIGITAL suggests its readers/audience to consult their financial advisors before making any money related decisions.)
