‘Prolonged war in the Middle East less likely than a peace deal'

The US involvement in Iran could queer the pitch for financial markets only if Iran or its proxies decide to escalate by targeting US bases or choking the Strait of Hormuz. That's something markets will be closely watching over the next few days as it could impact energy prices, with a fifth of global demand of 100 million barrels per day passing through the waterway. However, given the current global supply-demand dynamic, crude might not sustain at higher levels for too long, a plus for energy-dependent markets like India, believes Jyotivardhan Jaipuria, founder and MD of Valentis Advisors.
The US has joined Israel's war on Iran. What does this bode for financial markets, including in India?
With the US joining the war on Iran as we speak, focus on the markets will shift to events in the Middle East over the next few days. There are two possibilities which could play out now. First is the positive scenario where, post the US strikes, peace efforts move quickly, and this marks the beginning of the end of this phase of the war. The negative scenario is if Iran responds by hitting some US targets, which leads to a more prolonged war, especially if other countries get involved.
Read more: Is the Israel-Iran war a billion-dollar threat to Adani Ports & SEZ?
Currently, we think the second scenario is a lower probability, but something we have to keep a close watch on. Having said that, history shows that the impact of wars on stock markets is not long-lasting, and markets tend to bounce back quickly. The reason there is concern about the Middle East crisis is the price of oil, especially if energy infrastructure is hit in the war or more importantly, if the movement of vessels across the Strait of Hormuz is impacted. However, if we look at the current demand-supply balance, it is unlikely that oil can be sustained at high prices for very long. Hence, any surge in oil prices may impact markets in the short term, but investors should use that as a buying opportunity.
The market has recovered from the low of 21,743.65 on 7 April to around 25,000 now. But we have since been stuck in a narrow range, unable to decisively cross the 25,200 levels. The reason?
We have seen a sharp rally of around 12% from the lows in early April to mid-May. After such a sharp rally, it is normal and indeed healthy for the market to consolidate and absorb the gains we have seen. We also have to remember that the Iran-Israel conflict is also weighing on the markets.
The 90-day pause by US President Donald Trump on tariffs will expire on 9 July, and there is uncertainty on whether he will extend the pause. In this environment, a time correction would help bring valuations to better levels.
Analysts' expectations of earnings tend to be aggressive. Some expect Nifty EPS growth to double to 12% in the current fiscal year from that in FY25. What is your view?
We also expect earnings to recover from the 5% earnings growth we saw in FY25 to low double-digit levels. A low base will help year-on-year (y-o-y) earnings growth, especially since the government capex in FY25 was very slow in the first eight months of the year. We see three factors driving the improvement.
Firstly, rural demand should pick up as better monsoons lead to a better agricultural season. Secondly, urban demand should be better with the impact of the ₹1 trillion income tax rate cut helping boost consumer income. Lastly, the easy monetary policy and cut in interest rates will help both investment and consumer demand.
The Reserve Bank of India (RBI) has made a series of policy decisions addressing the cost of funds and liquidity. Will this, in particular, increase consumption and help stocks?
The RBI action is very positive, both for the economy as well as earnings. It is not just consumption but also investment demand that gets stimulated with easy liquidity and lower interest rates. The return ratios on projects as well as the profitability of companies change with lower interest rates. Easy availability of credit due to loose monetary policy also helps stimulate investments. Consumption demand is apparent with lower rates helping lower EMI for consumers.
What's your approach to negotiating current markets? Which bucket (large-, small- or mid-) do you believe has the potential for the highest return and why?
Our view is that investors should start moderating their return expectations relative to the return over the past few years post-covid. We would be looking at low double-digit returns in the market over the next few years.
Read more: Municipal bodies still shun public bond issues. There's a lot that's holding them back
At the beginning of 2025, we were in favour of large-caps over small- and mid-caps. With the correction in the small and mid-cap space, we are now neutral between these asset classes. The earnings growth in small and mid-caps will be stronger, which will probably compensate for the slightly higher valuations in the small and mid-cap space.
How is sentiment among foreign portfolio investors (FPIs), whose flows can move the needle, toward India among the emerging markets (EM) pack? They were substantial sellers from October to March this year. That changed in the following two months. Will it sustain?
There is general acceptance that within the emerging market space, India stands out as a strong economy with domestic demand. However, the general concern around India has been high valuations, both on an absolute and relative basis. In the middle of last year, India traded at a PE premium of close to 100% relative to the EM valuations. This was leading to selling by FPIs, especially after the stimulus by China in September 2024. After the underperformance of India, relative valuations became better at a 65% PE premium, closer to long-term averages, which has led to FPIs again increasing their weight on India. On an absolute basis, a decision by MSCI to move Korea to developed market status (meeting on 24 June) could help FPI flows to India and other emerging markets.
This year, we have seen around ₹65,000 crore worth of block deals in which promoters /PEs offloaded stakes. Does this worry you, and if not, why?
Selling by PE funds is natural as they need to return money to investors. At the same time, we are also seeing additional investments by PE funds. When you look at the selling as a percentage of India's market capitalisation, it is not very large. Having said that, we think this selling is an indicator that there is a general worry that valuations in the market are not cheap. Heavy selling by PE funds and promoters would also mean that funds to the secondary market go down.
How does the initial public offering (IPO)appetite look to you at this point? Will you actively invest through new offers?
It is good to have a buoyant IPO market since that helps investment demand and the economy. However, there was excessive euphoria in the IPO market last year with huge subscriptions. That euphoria has cooled, given the correction in the markets. However, liquidity in the market continues to be strong, and there is enough money for good-quality companies. In general, we find most IPOs coming at valuations that are more expensive relative to similar listed companies.
Read more: When diversification backfires: Four Indian companies walking a fine line
Are you bullish and bearish on any sectors, and why?
We like the financial space, where valuations are still attractive. Select banks and NBFCs with a greater proportion of fixed-rate loan books will benefit from falling interest rates and look attractive. We also like the cement space, where consolidation in the sector should help pricing power over the next couple of years. We are also nibbling some chemical names, where earnings will see a rebound, and stocks have underperformed quite a bit.

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