Change in politics, not geopolitics: Markets to focus on US-Iran conflict as state election dust settles, says Kotak

BJP won West Bengal, the Left lost Kerala, and TVK swept Tamil Nadu. Yet the Indian stock market is likely to look past these state-level political shifts and instead focus on global geopolitical risks and corporate earnings, Kotak Institutional Equities said in its latest strategy report.

Despite the sharp swings in political fortunes across Kerala, Tamil Nadu and West Bengal, the brokerage expects minimal impact on the central government’s administrative or legislative agenda.

Geopolitics vs state polls

While the election results saw challengers beat incumbents in three out of four states, notably TVK in Tamil Nadu and the BJP in West Bengal performing well, analysts at Kotak Institutional Equities believe that the "macro calculus" will now take centre stage.

“We note that India has a relatively election-free corridor over the next few months, which may result in the central government firmly focusing on managing India’s weakening macro in the near term and capacity building over the medium-to-long term,” the report said.

According to the brokerage, the primary concern for investors has shifted toward the West Asia conflict. The macroeconomic outlook remains fragile as negotiations between Iran and the US show little progress. “We stick with our base case scenario of a short conflict (few weeks) for now, but note the rising probability of a more adverse scenario of the conflict continuing for longer (few months or more), with asymmetric impact from higher-for-longer crude oil prices,” it said, adding that the prospect of a weak monsoon may further dent growth-inflation dynamics in the near term.

Decent earnings so far

Supporting the market amid these macro headwinds is a decent Q4 FY26 earnings season so far, according to the brokerage, which highlighted that the results have largely been aligned with expectations, resulting in only marginal cuts to future estimates.

"We maintain that India’s earnings may hold out better than the economy in the event of a more prolonged conflict (few months), given the earnings composition of the market," it said.

Valuations in Indian market relatively in fair zone

According to Kotak Institutional Equities, valuations of the Indian market are in the fair zone, relative to recent history and bond yields. It, however, highlighted that the recent rally in certain stock prices across select consumption and investment stocks has resulted in valuations turning ‘rich’ in these categories, while those of outsourcing and financials are in the inexpensive-to-fair zone currently.

"Meanwhile, valuations of ‘narrative’ stocks have seen a sharp rerating amid a resurgence in retail investor enthusiasm in their favoured segments,” it concluded.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)