The recent escalation of tensions in the Middle East caused concern in global financial markets at the beginning of this week. Nilsh Shah, Managing Director of Kotak Mahindra AMC, informed Puneet Vadhav via phone that investors in the stock market should lower their expectations for returns in light of recent geopolitical events.
Market Reaction Analysis
According to Shah, the markets are not overreacting to the latest developments in the Middle East. He noted that markets rise with signs of resolution and correct when concerns about the situation's development resurface. This volatile nature is natural, as much depends on the statements and actions of President Trump. The resumption of tensions in the Middle East is likely to maintain nervousness in the markets.
Role of Oil Prices
Although it is difficult to name a specific trading range, Shah emphasized that currently, crude oil prices will be the key driver for the stock market. However, despite a brief rise above $120 per barrel, the price corrected to approximately $68–$70 after the ceasefire. In his opinion, this does not indicate excessive market anxiety.
Impact of Supply and Demand
It is important to consider not only the cost of oil but also its supply. The market reacts immediately if there is concern about a possible disruption of supplies, such as problems in the Strait of Hormuz. Even the probability of supply restrictions affects sentiment in the oil market, and consequently, the stock market. The oil market signals a potential re-restriction of supplies, which could lead to another rise in prices, which in turn will affect the dynamics of the stock markets.
Corporate Earnings and Forecasts
Shah explained that the market already accounts for the scenario where a decrease in oil supply raises prices, which ultimately leads to a fall in demand and negatively affects corporate profits. Forecasting a return of crude oil prices to $100 or higher is difficult, as it all depends on local events and the degree of supply disruption. Furthermore, the market has begun to realize that President Trump's statements do not always lead to action, making market reactions more measured.
Prospects and Recommendations for Investors
The results of the first quarter of fiscal year 27 are expected to reflect the full impact of the conflict in the Middle East. It is assumed that due to potential losses for Oil Marketing Companies (OMCs), overall corporate profit growth may decline to low single digits or even become negative. Even excluding OMCs, the impact will be felt across the entire supply chain, including petrochemicals, petroleum products, polymers, and chemicals. Large companies are expected to see profit growth in low single digits, while small and medium-sized enterprises are expected to see growth in low double digits. Due to a series of factors—changes in the labor code, the Middle East conflict, and potential monsoons—the recovery of corporate earnings is delayed. Volatility is expected for the remainder of 2026, with the oil market remaining the main driver of the stock market. Investors are advised to maintain a neutral asset allocation, invest gradually, and account for volatility, as valuations remain reasonable.