Geopolitical Tensions Heighten Earnings Risks
A prolonged conflict in West Asia poses a substantial threat to global corporate earnings, particularly if crude oil prices remain above $100 a barrel. This warning comes from Saion Mukherjee, managing director and head of India equity research at Nomura, who highlights the significant uncertainty currently impacting market valuations.
Initially, there was an expectation that the conflict might be short-lived. However, its continuation has amplified geopolitical concerns, a factor now clearly reflected in market valuation multiples. Mukherjee stresses the need for investors to be highly selective in their stock choices given the volatile environment.
India's Market Performance and FPI Trends
India's equity markets have experienced subdued returns for nearly two years, burdened by geopolitical uncertainties, US import tariffs, and substantial selling by foreign portfolio investors (FPIs). The global attraction towards AI-related investment opportunities in other markets, from Taiwan and Korea to the United States, has diverted capital.
FPIs withdrew a staggering Rs 1.66 lakh crore from India's equity market and further offloaded Rs 2.50 lakh crore worth of equity in 2026 up to September 29. While July (Rs 20,200 crore) and August (Rs 29,631 crore) saw FPIs as net buyers, they reverted to being net sellers in September, divesting Rs 25,662 crore in stocks, according to NSDL data.
Indian equity valuations have undergone a considerable correction, with the BSE Sensex down over 14% year-to-date in 2026. In contrast, the S&P 500 gained 12%, and Japan's Nikkei 225 rose 26% during the same period. Despite this, Nomura has maintained its Nifty50 target of 25,900 for March 2027, though Mukherjee suggests investors may need to accept lower valuations in the foreseeable future.
Key Factors Influencing Valuations
Mukherjee identifies several critical factors impacting how much investors are willing to pay for Indian equities. Absolute crude oil levels are a direct concern for earnings. Beyond that, the valuation multiple itself is heavily influenced by the pace of technology disruption driven by AI, alongside persistent geopolitical uncertainty and the global tariff situation. These elements collectively shape the longer-term investment narrative for India.
Strategic Stock Selection Amid Uncertainty
In this challenging climate, Mukherjee emphasizes that investors cannot simply follow any narrative but must prioritize valuation comfort. He advises against buying even good companies at excessive prices.
Nomura holds a favorable view on sectors such as financials, particularly private sector banks, where valuations are attractive. Pharmaceuticals also present opportunities due to reasonable valuations. Certain auto ancillary companies, identified as high-class and globally competitive, are also highlighted.
Despite ongoing pressure on software services due to AI-driven deflationary forces, Mukherjee remains constructive on the sector. He anticipates that as enterprises increasingly adopt AI, volumes for IT services will eventually pick up. However, he expresses a bearish outlook on consumer goods companies, citing rich valuations for larger firms, significant disruption in the online space, and the potential negative impact of a poor monsoon on consumption.