Daily Voice: Markets may use current geopolitical situation to correct over next few months; Q1FY26 to be next trigger, says PL Capital's Sandeep Neema

There is a high chance that the current geopolitical issue will lead to an oil shock; Iran produces 3.5 percent of global crude oil production and any disruption in that output would lead to a spike in oil prices. The spare capacity available with large crude producers is limited, so it is unlikely that they can cover-up for the lost production quickly. Add to that, the threat of closure of Hormuz Strait, which handles almost 20-25 percent of global crude trade; any perception that the route will be closed for movement will result in a spike in crude oil prices.

Do you think the impact of the current Israel-Iran tension on the market will be short-lived? What are the next triggers for the market?

Historically, we have seen that in earlier such events, markets have recovered quickly post the event. In Indian markets, we haven’t seen a significant drawdown due to such tensions. But Indian markets are trading at 22x forward multiples and earnings growth in the Q4FY25 hasn’t been very encouraging.

We have already got a higher-than-expected rate-cut & RBI has changed its monetary policy stance to Neutral. Thus, in the short-term most of the good news is already price-in. Markets could use the current geo-politics situation to correct over the next few months. The next trigger will come through earnings growth, which could be post the Q1FY26 season.

Do you see gold prices continuing to make new highs considering the current global environment amid tariff developments?

Yes, Gold will continue to attract attention in the current environment of uncertainty due to geo-politics and tariff war. Investors like to move into safe assets in such times of global upheaval. And gold has been a traditional safe asset.

Add to that, the current dollar weakening, & gold prices thus have been able to hit their all time highs. In normal course, gold could have seen a correction if Dollar strengthens; however, in the current global context, we could probably see safe havens like Gold and Dollar both appreciating. It’s the safety that most investors will be looking at than returns.

Do you believe inflation is likely to undershoot the RBI’s projections, at least for the remaining part of 2025?

It looks unlikely that we might see soft inflation numbers in the near future. With expectations of higher crude oil prices, inflation will certainly move up. Every $10 increase in crude prices increases CPI inflation by 35bps. Add to that, the uncertainty around monsoon which could have a bearing on inflation.

So in all likelihood, we may see a higher inflation trajectory if these factors continue to play-out. RBI has forecast year-end inflation at 3.7 percent which could have an upside bias now due to the above factors.

Do you see a strong pickup in rural consumption now?

Rural consumption growth depends on a good monsoon and hence a good agriculture crop output. The current monsoon season has seen a deficit of almost 30-35 percent in June rainfall till date. If this continues, we may see the crop patterns getting affected leading to lower output. This has the potential to impact rural consumption in a significant manner.

Thus, we will have to wait and see the progress on monsoon to arrive at a conclusion about growth in rural consumption. Our base case scenario assumes that we may not get a normal monsoon in 2025 season.

Is it the right time to focus on financial services, hospitals, and consumer discretionary sectors?

Longer term, Financial services and Hospitals are great sectors to remain invested-in while consumer discretionary will continue to be impacted by employment, rural and urban income growth and overall GDP numbers.

For Financial services, we have seen a rate-cut which will impact banks’ profitability in the near future. We may thus see some volatility in both Financial services & Consumer discretionary in the near-term with a downward bias.

Hospitals is a secular growth story in India and is not impacted so much by the short-term fluctuations in economic growth; the sector is also a defensive sector with more certainty in cash flows. In order of preference, one can look at Hospitals, Financial Services and consumer discretionary.

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