Daily Voice: Even without West Asia war escalation, a prolonged resolution timeline could keep energy prices elevated, says Union AMC’s Harshad Patwardhan- Moneycontrol.com
Steep panic correction in market in March resulted in valuations coming to more reasonable levels
According to Harshad Patwardhan, the Chief Investment Officer at Union Asset Management Company, even without further escalation of West Asia war, a prolonged resolution timeline could keep energy prices elevated for longer, which may weigh on economic activity.
Additionally, any damage to production infrastructure could result in prices staying above pre-conflict levels for some time, and market may gradually factor in this evolving reality once more evidence becomes available from the companies, he said in an interview to Moneycontrol.
On the FII flow, he is of the view that while the exact timing of a reversal is difficult to predict, the probability of a shift appears to be improving.
Do you see a real possibility of a full-blown war in West Asia again, considering recent commentaries, or do you believe a deal is likely to be reached?
Our base case expectation is that we have seen the worst of the ongoing Middle East war. While we cannot completely rule out a resumption of fighting; it is unlikely to be as severe as it was in the month of March 2026. At this stage, we expect gradual movement towards a potential diplomatic resolution over the coming weeks.
What is your take on equity markets given the recent movement in oil prices?
Markets currently appear to be pricing in the possibility of a near-term resolution among the involved parties. However, the reaction is unlikely to hinge solely on whether oil prices remain above or below US$100 per barrel. The duration of the conflict may prove to be more critical variable.
Even without further escalation, a prolonged resolution timeline could keep energy prices elevated for longer, which may weigh on economic activity. Additionally, any damage to production infrastructure could result in prices staying above pre-conflict levels for some time. Market may gradually factor in this evolving reality once more evidence becomes available from the companies.
Are you currently constructive and bullish on the markets? If yes, what supports this view despite the uncertainty surrounding the Strait of Hormuz?
Our assumption is that the worst of the conflict may be behind us. With that base case, we turned relatively constructive on Indian equities following the ceasefire announced in the early April 2026. The steep panic correction in the market in the month of March 2026 resulted in valuations coming to more reasonable levels.
By the end of March 2026, markets were trading broadly in line with 30-year average in terms of one year forward PER (Price-to-Earnings ratio) and as much as two standard deviations below the 10-year average. The valuations were not this cheap for a long time and the risk reward looked attractive.
Do you think the next quarter may be challenging for corporates though the market already priced this in?
We expect the next quarter may prove somewhat challenging as the effects of the conflict on higher prices and supply chain disruptions will be felt primarily in this quarter. This will be true even if the truce were to be reached soon. At a company and sector level, the full extent of these headwinds may not yet be completely reflected in market expectations.
Do you believe that FII selling might be nearing exhaustion?
FII (Foreign Institutional Investor) selling in the secondary market stood at approximately US$14.6 billion in March 2026, marking one of the highest monthly outflows on record. Over a longer period, FIIs have remained net sellers in Indian secondary markets, and positioning appears to be significantly underweight from a historical perspective.
While the exact timing of a reversal is difficult to predict, the probability of a shift appears to be improving. With signs of stabilization in the Middle East and relatively stronger earnings growth prospects in India compared to the past two years, FII interest could gradually improve over time.
Do you expect small-cap and nano-cap stocks to outperform the broader market going forward?
In this phase of change of direction in the markets, small cap and nano-cap stocks often outperform broader market initially. However, we expect broader markets including large/ midcaps to participate- particularly when foreign flows start to improve.
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