West Asia Tensions May Keep Markets Volatile; Kotak Research Retains Positive India Market Outlook, Flags Key Risks

Higher crude oil prices following fresh tensions in West Asia have once again brought geopolitical risks into focus. Kotak Research, however, said the developments do not warrant a change in its broader view on Indian equities. While geopolitical uncertainty remains a near-term overhang for global markets, Kotak Research believes India's broader macroeconomic fundamentals remain supportive and continues to maintain a constructive stance on domestic equities over the medium term.

In its latest strategy note, Kotak Research said the sharp rebound across several sectors over the past one to three months, particularly in mid- and small-cap stocks, has reduced the number of attractive opportunities in the market. Even so, it expects the macro environment and earnings outlook to improve from current levels.

We expect the latest escalation in West Asia to remain contained through diplomatic efforts. However, it warned that a prolonged rise in crude oil prices could emerge as the biggest risk by adding to inflationary pressures.

India Market Outlook: Macro fundamentals remain stable

The note said India's macroeconomic position has improved over the past few months, supported by lower crude oil prices and easing pressure on corporate margins, particularly across consumption-oriented sectors. It expects the economy to be supported by moderate growth, manageable inflation and a stable fiscal position.

The risk of a sharp deterioration in India's balance of payments remains limited. Softer crude oil prices over recent months, along with measures taken by the government and the Reserve Bank of India to support capital inflows, are expected to provide a cushion if global volatility persists.

Stock Market Valuations: Rally narrows opportunities

The recent recovery in equities has also changed the valuation picture.

According to Kotak Neo Research, consumption and investment-linked stocks are now trading at fair-to-rich valuations after the sharp rally. In comparison, banking and financial services (BFSI) and information technology services continue to trade at relatively attractive valuations, leaving the broader Nifty 50 at reasonable levels.

It also noted that a large part of the market correction earlier this year was driven by weakness in IT services stocks, while several private sector banks and consumer staples companies have largely traded sideways. As a result, valuation gaps across sectors remain wide, making stock selection more important than before.

West Asia Conflict, Monsoon Seen as Key Risks

The report identified two factors that could influence market sentiment over the coming months.

The first is any prolonged escalation in the West Asia conflict, which could keep crude oil prices elevated and complicate the inflation outlook. The second is the progress of the monsoon. Uneven rainfall could affect rural demand and lead to higher food prices, although inflation currently remains manageable.

Nifty 50 Outlook

Kotak Neo Research has estimated Nifty 50 earnings per share (EPS) at ₹1,244 for FY27 and ₹1,425 for FY28. Based on these projections, the benchmark index is trading at 19.5 times FY27 estimated earnings and 17 times FY28 estimated earnings, suggesting valuations remain reasonable despite the recent rebound.

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