Investors not quite sure markets have passed the Strait of Hormuz

Momentum could carry equities higher in the near term, but its endurance will hinge on fourth-quarter earnings, the trajectory of crude prices and whether foreign institutional investors reverse their bearish bets, according to research heads and strategists.

While the immediate overhang from the conflict is fading and energy flows should normalise over the coming weeks, the stock market recovery is unlikely to be linear, said Sanjay Mookim, head of India Equity Research, JP Morgan.

“The key variable is how oil prices settle, as India had been benefiting from imports at $60-65 per barrel, and now, every $10 move higher translates into roughly $15 billion of incremental outflows.”

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navigating peace: Equities could rise for now, but linear recovery ‘unlikely’ Street to take direction from Q4 earnings, oil prices Also, watch out for any reversal of FII bearish bets

Brent crude June futures have dropped more than 13% to $95.1 /barrel on Wednesday evening from a recent high of $119.5 at the start of the conflict. Notwithstanding the initial cheer around the oil price decline, uncertainty over the temporary truce is keeping the investors on the edge.

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“Recent volatility in oil, gas, and related macro variables may be somewhat manageable for now, but optimism remains tempered with caution among investors,” said Gautam Chhaochharia, head of Global Markets, at UBS India.
After the 4% gains on Wednesday, the Sensex and Nifty are down 4.7% from February 27 – the start of the war. If talks between the US and Iran progress well over the next two weeks, the indices could recoup these losses but some pre-existing concerns could resurface. “Even prior to the conflict, concerns around domestic valuations, growth recovery, and AI were weighing on Indian markets,” said Chhaochharia, who remains underweight on India among emerging markets. “Assuming no further escalation, these factors are likely to re-emerge as market drivers.”

Investors will watch companies’ fourth quarter earnings to gauge the impact of rising raw material costs on profitability. “Higher energy costs, combined with a weaker rupee, are likely to keep pressure on corporate profitability in the near term,” said Mookim. “While the sharp day-to-day volatility should ease, the macro effects, particularly on consumption, are another key concern.”