'A dying regime': Iran's options against Israel, India stock market outlook

Stock market outlook: Nirav Sheth, CEO for Institutional Equities at Emkay Global Financial Services, has expressed concerns over the potential for immediate negotiated talks between the US and Iran. He believes that Israel does not favour such negotiations, suggesting that any positive dialogue is contingent upon a significant setback to Iran’s nuclear advancements by Israel.

Sheth anticipates an extended conflict between Israel and Iran over the forthcoming weeks or months. He expects markets to maintain a calm demeanour, although they may remain cautious about potential US involvement. “This likely means an extended war over the next few weeks or, maybe, months. The markets may remain sanguine around this possibility, and will be apprehensive about USA’s direct involvement – forced or otherwise. A dying regime may make irrational decisions,” Sheth said in a note.

“Iran’s optionality is severely constrained by nearly incapacitated militant proxies, namely Hamas and Hizbullah, and a more far flung and thus less effective Houthis. Iran is at its weakest now, over and above its crippled air defense system. Any attempt to broaden the regional conflict will almost certainly risk a direct war with USA – one that it cannot win, and would expose it to the risk of complete annihilation of nuclear progress and, perhaps, instigate a regime change,” Sheth said.

Reflecting on recent events, Sheth noted that markets underestimated the likelihood of a direct Israeli assault on Iran. Over the past 18 months, Israel has systematically weakened Iran’s proxy militias, initially perceived as a response to Hamas’s attacks on Israel. He stated, “Israel has methodically and intensely decapacitated the proxy militia of Iran.”

The conflict has broader economic implications, particularly concerning oil prices. “Even then, higher oil prices for longer will eventually seep into inflation and inflationary expectations, also having a bearing on the monetary policy,” Sheth indicated. Such developments could influence India’s fiscal capacity to handle rising oil costs, though Sheth acknowledges that India is better positioned financially compared to previous years.

Sheth explained that significant surges in oil prices could impact India’s inflation and monetary policy. He remarked on the interconnected nature of such fluctuations, noting that a sharp increase in prices would likely affect the balance of payments and foreign investor sentiment towards the rupee. “Somewhat co-related and often reflexive is the impact on BOP, accentuated by FII selling,” he said.

Reflecting on the recent volatility, Sheth highlighted changes in US bond yields and the dollar index following a 15 per cent spike in oil prices. Despite these fluctuations, both have since stabilised. He attributed the dollar’s guarded movement to a broader diversification trend in response to global trade dynamics.

Although the scenario remains complex, Sheth provided insights into potential market corrections. He assumed  that a probability of a 25-50 per  cent chance for a 10 per cent correction in the Nifty, with expected corrections ranging from 2.5 per cent to 5 per cent. “For most institutional investors, it makes sense to sleep over it rather than make big portfolio changes,” Sheth advised. This approach reflects a strategic patience that could help mitigate potential risks.

Sheth’s analysis underscores the importance of cautious optimism and strategic patience for investors amid ongoing geopolitical tensions. He emphasised that while the landscape might appear volatile, thoughtful assessment and readiness could mitigate potential risks. Investors are encouraged to stay informed and prepared, adapting to changes as they arise.