West Asia Tensions: Impact on India’s Markets, Energy & Investment Flows

Rising tensions in West Asia are forcing a reassessment of risk for Indian investors, particularly concerning energy security, currency fluctuations, and the flow of foreign capital. Even as Indian equity markets have demonstrated resilience, the potential for prolonged conflict and its impact on global energy prices remain significant concerns. Sridhar Sivaram, Director of Investment at Enam Holdings, articulated these anxieties, highlighting India’s substantial reliance on the Gulf Cooperation Council (GCC) region for crucial resources and remittances.

Sivaram, speaking to ET Now, emphasized the unique nature of the current geopolitical situation compared to the Russia-Ukraine war. “Unlike the Russia-Ukraine war which was more in the hinterland…this has impact on crude,” he stated. India imports approximately 50% of its crude oil and 30-40% of its Liquefied Natural Gas (LNG) from GCC countries. Remittances from the region represent a significant portion of India’s economic inflows. A prolonged conflict, poses a multifaceted threat. Sridhar Sivaram’s assessment underscores the vulnerability of the Indian economy to disruptions in this critical region.

Energy Price Outlook and Rupee Pressure

Sivaram doesn’t anticipate a swift return to normalcy in energy markets. “I do not spot crude come back to the 60 handle in a hurry,” he commented, suggesting that elevated prices are likely to persist even if production resumes. This outlook presents a short-term negative for India, whereas he acknowledges that some of the impact may already be factored into current market prices. The situation is also contributing to pressure on the Indian rupee, which recently breached the 92-per-dollar mark.

Beyond energy, foreign institutional investor (FII) activity is also under scrutiny. Sivaram points to a broader trend of FIIs shifting their focus to other Asian markets, driven by stronger earnings growth. “Asia is going through…an earnings super cycle,” he explained. Specifically, he cited projected earnings growth of 100% in Korea and 25-30% in Taiwan, largely fueled by demand for semiconductors and DRAM chips. China is also experiencing robust earnings growth, estimated in the 15-18% range. Sridhar Sivaram suggests this regional strength is drawing capital away from India, where earnings growth has been comparatively sluggish.

The Earnings Disconnect and FII Flows

India has struggled with single-digit earnings growth for the past 18 months. While Sivaram anticipates an improvement to around 15% in fiscal year 2027 (starting April 1st), this still lags behind the growth rates seen in other parts of Asia. This discrepancy in earnings potential, coupled with relatively high valuations in India, is making it less attractive for FIIs. As Sivaram noted, investors speaking with colleagues in Modern York are weighing India’s 15% projected growth against valuations of 20 times earnings, compared to single-digit valuations in Taiwan, Korea, and China.

The relative performance of Asian markets further complicates the picture. Despite volatility, Korea’s market is up 30% year-to-date, demonstrating the appeal of the region’s growth story. Sivaram believes it will seize time for FIIs to return to India in significant numbers, given these competing opportunities. This dynamic highlights the importance of domestic demand and internal growth drivers for the Indian market.

Macroeconomic Implications and Regional Interdependence

India’s economic ties to the GCC region extend beyond oil and gas. Remittances and trade flows are also substantial, creating multiple “macro touch points” vulnerable to disruption. Sivaram estimates that approximately 50% of remittances to India originate from the GCC countries. The economic impact of the conflict is spreading across the entire GCC region, even beyond the directly involved nations. This interconnectedness underscores the potential for broader economic consequences.

In the near term, companies with significant exposure to the Middle East may experience earnings uncertainty. Sivaram anticipates a noticeable impact on this quarter’s results, as many Indian companies export a substantial portion of their goods to the region. However, he suggests that this impact is likely to be temporary, settling down within a quarter. He cautions against viewing the situation as a clear buying opportunity, advocating for a selective approach to investment.

Beneath the Surface of Headline Indices

Despite the geopolitical risks, Indian benchmark indices, such as the Nifty 50, have held up relatively well. However, Sivaram warns that this performance may mask underlying weakness in the broader market. “The Nifty masks the problem that we have in the broader market,” he stated, noting that the headline index has been supported by a few key sectors. This divergence between the Nifty and the broader market suggests that the overall health of the Indian equity market may be more fragile than it appears.

A Cautious Outlook for the IT Sector

Looking ahead, Sivaram anticipates that earnings growth could recover, driven by a favorable base effect. However, he remains particularly cautious about the information technology (IT) sector. He believes the sector faces structural challenges related to the rise of artificial intelligence (AI). “I have been very negative on IT for over two years…the terminal value is eroding,” he explained. He draws a parallel to the media industry, where the emergence of over-the-top (OTT) streaming services led to a re-rating of traditional media companies, even if those companies remained profitable.

Sivaram argues that AI will not eliminate IT companies, but it will erode their long-term growth potential, leading to a decline in price-to-earnings (P/E) ratios. He also highlights the broader implications of AI for employment in India, noting that the technology is likely to reduce the demand for IT professionals, creating a “second derivative impact” on the labor market. West Asia tensions are adding another layer of complexity to an already challenging environment for the Indian IT sector.

The Missing AI Play in India

Despite the global excitement surrounding AI, Sivaram believes India currently lacks a compelling investment opportunity in the space. “I do not think we have a clear AI play,” he stated. He notes that FIIs are not coming to India specifically to invest in AI, preferring to focus on opportunities in Korea and Taiwan, where AI-related earnings are already materializing. This lack of a clear AI narrative is a disadvantage for India in attracting foreign capital.

For investors, the message is one of caution and selectivity. Geopolitical risks, global competition for capital, and sector-specific challenges all require careful consideration. The market is likely to continue rewarding companies with strong fundamentals and sustainable earnings growth, rather than broad-based speculation.

What to watch: The duration and escalation of the West Asia conflict will be paramount. Monitoring crude oil prices, rupee volatility, and FII flows will provide crucial signals about the impact on the Indian economy. Earnings reports from companies with exposure to the Middle East will also be closely watched in the coming quarters.