Global crude oil prices and geopolitical uncertainty in West Asia are currently the primary drivers of market direction, overshadowing domestic factors. According to Emkay Investment Managers CIO Manish Sonthalia, crude oil emerges as the single most important variable for Indian equities. The ongoing geopolitical situation remains unresolved, with crude markets hovering around ₹116 per barrel after reaching $125 earlier. As reported by The Economic Times, the biggest variable currently is oil and the ceasefire which was supposed to result in a diplomatic settlement has not yet fully played out. If embargoes continue, oil inventories will reach stress levels by June, creating significant market volatility. Sonthalia warned that till about ₹125 gets hit, broadly we have seen the negatives as far as Indian markets are concerned. Supply-side risks are intensifying due to production constraints in West Asia, with inventories expected to tighten further.
The market is currently oscillating purely on geopolitical headlines, with Sonthalia warning that markets will be very range-bound in the near term, maybe between 22,000 and 25,000. He identified 22,000 as a critical support zone for Nifty, noting that the floor comes at around 18 PE. Currently, Indian markets are trading at around 19.5 times FY27, which Sonthalia considers fair-to-rich levels. He cautioned that higher crude could break this range, particularly if oil prices spike beyond $125 on the Brent side. The FII flows are not expected to build in the near future, with Sonthalia citing currency depreciation and overshooting risk on the current account deficit beyond 2%. However, he emphasized that domestic investors will remain the stabilizing force through SIP flows and domestic mutual funds, creating a scenario where domestic liquidity will provide the primary cushion against downside shocks until clarity emerges from the West Asian crisis.
While current corporate performance shows 50% of companies beating estimates and 25% missing estimates, sustained oil inflation poses significant risks for FY27. According to Sonthalia's analysis, sustained oil inflation could force downgrades to FY27 earnings estimates due to inflation shock, rate increases, working capital stress, and supply chain disruption. He currently pegs earnings growth at 11-12% for FY27 but acknowledges downside risk if the West Asian crisis persists. As reported by The Economic Times, if this embargo does not end very soon, then obviously FY27 numbers is going to be cut due to balance sheet stress on companies. The 18 PE level is seen as the floor for valuations, coinciding with the 22,000 Nifty level. For the fourth quarter, at least 50% of the companies which have reported and those which we track have reported numbers and are beating the estimates.
Despite macro risks, Sonthalia believes stock-picking opportunities remain strong, especially in energy-linked and financial sectors. He highlighted power, energy, critical minerals, and AI infrastructure build as sectors likely to perform well. Within financials, he remains constructive on banks and insurance, including health and general insurance segments. Additionally, he favors semiconductor space and mobile EMS sectors. However, he warned against overcrowded trades, emphasizing that valuations remain a big hygiene check that investors need to consider. He cautioned against over owned sectors like the transformer space or some of these high-fly names everybody seems to be buying, noting that valuations are a big hygiene check that one needs to do.
Sonthalia does not expect meaningful foreign inflows in the near term, citing macro headwinds including currency depreciation and overshooting risk on the current account deficit beyond 2%. He emphasized that domestic investors will remain the stabilizing force through SIP flows and domestic mutual funds. The FII flows are not expected to build in the near future, creating a scenario where domestic liquidity will provide the primary cushion against downside shocks until clarity emerges from the West Asian crisis. Markets could swing either way based on whether there is a settlement on a diplomatic basis or military basis, making the near-term trajectory hinge almost entirely on crude oil and West Asia developments.
