A prolonged West Asia conflict will increase risks to corporate earnings, says Nomura's Saion Mukherjee

Over the last several months, despite the significant uncertainty due to the war in West Asia, that has pushed up energy prices, corporate earnings were a bright spot in the April-June quarter. However, should the war drag on and oil prices were to remain above $100 a barrel, risks to earnings will rise, a market analyst has warned.

"We are dealing with significant uncertainty. Initially, the thought was, maybe it would be a short war, and things could end quickly. But things have gone on, and if it goes on, then surely there is more risk to earnings and the concern around geopolitics, which is reflected in the valuation multiple, is definitely there," said Saion Mukherjee, managing director and head of India equity research at Nomura.

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India's equity markets have seen lacklustre returns for almost two years now, weighed down by geopolitical and US import tariff-related uncertainties, as well as heavy selling by foreign portfolio investors, as AI-related ideas became attractive from Taiwan and Korea to the United States.

FPIs pulled out Rs 1.66 lakh crore from India's equity market and have further offloaded Rs 2.50 lakh crore worth of equity in 2026 till September 29.

FPIs had turned net buyers in July (Rs 20,200 crore) and August (Rs 29,631 crore), raising hopes that foreign investors may be relooking at India. However, they turned net sellers again in September, offloading Rs 25,662 crore worth of stocks, according to data from NSDL.

Indian equity valuations have corrected a fair bit as the market has underperformed many other markets. Year-to-date in 2026, the BSE Sensex is down over 14%. In comparison, the S&P 500 is up 12% in the same period, and the Nikkei 225 in Japan has gained 26%.

Nomura still has retained its Nifty50 target of 25,900 for March 2027, which it had set a few months ago. But, according to Mukherjee, at least in the foreseeable future, investors may have to reconcile with lower valuations given the uncertain environment we are in.

"Crude oil levels in absolute terms are one factor which will hurt earnings. But what about the valuation multiple? How much you should pay for India? That is being determined by what you think about technology disruption, because of AI, number one, and number two is the geopolitical uncertainty, the tariff situation, for instance. Those things can hurt your longer-term story, which is getting reflected in the valuation," he noted.

Mukherjee stresses that one will have to be very selective right now when selecting stocks, where there is valuation comfort, and one can't just simply follow any narrative.

"You cannot buy a good company at any price. That's very clear to us. You have areas like financials, pharmaceuticals, where the valuations are not very high. Even where the valuations are high, we really have to ensure that these are great companies where the valuation is justified. Maybe, areas like auto ancillary, for instance, I think some really high-class companies are globally competitive," pointed Mukherjee.

One sector that has seen massive correction is software services. IT companies have been under pressure for quite some time now, with investors worried AI and automation will have a massive impact on the companies' business.

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But Mukherjee remains constructive on the sector, expecting AI-related volumes to start picking up at some point.

"We are going through a deflationary pressure in IT services because of AI, but as enterprises use AI in a much bigger way, you would see volumes for IT services pick up," he feels.

Mukherjee also has a positive view on financial services, particularly private sector banks where valuations are attractive. Although one may have to watch the non-banking financial services space, as concerns may emerge should a poor monsoon lead to a slowdown in rural markets.

He also remains bearish on consumer goods companies, where he pointed that valuations of the larger firms still remained rich and there was a lot of disruption happening in the online space. A poor monsoon this year, which could have a bearing on consumption, could further weigh on the sector, Mukherjee noted.