Why a peace deal won't solve India's stock market problems | Sensex | US-Iran war | Crude oil

[00:00:00][music] >> Reports of US-Iran negotiations sent markets into rally mode. The Sensex jumped, India VIX fell sharply, and the BSE's combined market capitalization crossed $5 trillion.

[00:00:17]For investors, it looked like a major source of uncertainty was finally disappearing. But here is the question, was the war really the biggest problem facing Indian markets, or was it simply masking deeper issues that were already dragging stocks down? Let's understand in markets this week.

[00:00:39]The peace deal is undoubtedly good news.

[00:00:42]Lower geopolitical tensions could ease pressure on oil prices, improve sentiment, and reduce volatility. But many market experts argue that India's underperformance began long before the conflict in West Asia. According to Shankar Sharma, founder of G Quant [music] Investec, the market's struggles have been building for nearly 2 years.

[00:01:04]The rupee has been one of the world's weakest-performing [music] major currencies over the past year.

[00:01:09]Corporate earnings growth has disappointed, and [music] foreign investors were selling Indian equities well before the conflict escalated.

[00:01:17][music] In other words, the war may have worsened sentiment, but [music] it didn't create the underlying problem.

[00:01:28]So, if the war fades into the background, what [music] becomes the next big market story?

[00:01:34]Many analysts point to the proposed India-US [music] trade agreement.

[00:01:38]Reports suggest India could commit to purchasing $500 billion worth of American goods over 5 years.

[00:01:45]Now, that may help [music] strengthen strategic ties with Washington. But it could also reduce India's [music] trade surplus with the US.

[00:01:54]And that has implications. A narrower trade surplus could put pressure on the current [music] account, the balance of payments, and ultimately the rupee. For some analysts, this is a much bigger structural risk than the conflict itself, >> [music] >> and one that markets may not be fully pricing in.

[00:02:15]If large cap stocks continue facing pressure from foreign investor selling, where should investors look then? Sharma believes the answer may lie outside the Nifty. [music] He argues that biggest wealth creation opportunities remain in small cap stocks. One reason is ownership. Historically, foreign institutional investors have had lower exposure to small caps than to large cap stocks. That means there is less risk of a large FBI exodus weighing on those companies. The FBI overhang remains concentrated in many large cap and [music] benchmark stocks. And investors still do not know how much more selling may be ahead.

[00:03:00]Not everyone is cautious [music] though.

[00:03:02]Some analysts see clear winners if tensions continue to ease. Bernstein believes oil marketing companies could be among [music] the biggest beneficiaries.

[00:03:11]Lower crude prices would support margins and improve profitability. Sectors such as aviation, logistics, cement, [music] paints, and automobiles could also benefit from easing energy costs and softer inflation. [music] And some analysts even see opportunities for Indian infrastructure companies if reconstruction activity accelerates across parts of West Asia.

[00:03:38]So, the US-Iran deal is unquestionably good news for markets. It removes a major source of uncertainty and gives investors a reason to breathe easier.

[00:03:49]But India's market challenges did not begin with the war and [music] they may not end with a peace deal either.

[00:03:56]Because once the geopolitical headlines fade, investors will once again be forced to confront the questions [music] that were already hanging over the market.

[00:04:06]Earnings, foreign flows, the rupee and India's [music] long-term growth story.

[00:04:11]Follow Business Standard for more such explainers.