New Delhi: The aftershocks of the West Asia war are now rippling through Dalal Street, prompting global brokerages to reassess their India stance as oil-driven inflation risks, earnings uncertainty and structural gaps come into sharper focus.
J P Morgan has downgraded Indian equities to ‘neutral’ from ‘overweight’, flagging a combination of elevated valuations, earnings risks, capital dilution and limited exposure to next-generation technologies. The move follows closely on the heels of HSBC cutting its rating to ‘underweight’, underscoring a growing consensus among global investors that India’s near-term risk-reward equation has weakened.
At the heart of the downgrade lies the macro disruption triggered by the West Asia conflict. Higher crude prices are feeding into inflation, squeezing consumption and raising concerns over corporate profitability in an economy heavily dependent on imported energy.
HSBC captured this vulnerability, noting that “India’s reliance on imported energy, and the resulting risks to inflation and domestic demand, have cast doubts on the durability of the ongoing earnings recovery.” The brokerage expects consensus earnings forecasts of 16% year-on-year growth for 2026 to be revised downward in the coming months.
J P Morgan, too, sees earnings coming under pressure, citing supply disruptions and elevated costs despite a ceasefire, with energy flow normalisation likely to take another three to four months. The brokerage has already cut its FY27 earnings estimates by 2-10% across sectors such as consumer, auto, financials and oil marketing companies.
“Challenges will manifest across sectors in various ways, including direct consumption impacts, margin compression, operational disruption and second-order effects. We cut our CY26/27 MSCI India earnings growth forecasts by 2%/1%, to 11%/13%,” wrote Rajiv Batra of JP Morgan in a recent note.
At the same time, valuations remain a sticking point. Even after moderating from a peak premium of 109%, Indian equities still trade at a 65% premium to the MSCI EM index. This leaves little cushion against earnings downgrades, especially when peers such as Korea, Brazil, China, Mexico and South Africa offer comparable or better growth at cheaper valuations.
J P Morgan has cut its Nifty 50 targets across scenarios, pegging the index at 30,000 in the bull case, 27,000 in the base case and 20,500 in the bear case for 2026.
AI gap, capital dilution & shifting global flows
Beyond cyclical pressures, structural concerns are also weighing on the equity market sentiment. A key issue flagged by J P Morgan is India’s limited exposure to high-growth technology themes such as AI, semiconductors, datacentres and robotics.
“India is making progress, like startups in AI, big investments in data centres and chip design centres for global firms, but its presence in these sectors is limited, especially in the large-cap index,” Batra said.
This gap is becoming more pronounced as global capital pivots towards markets leveraged to the accelerating AI investment cycle. J P Morgan has upgraded Taiwan and the broader technology sector to overweight, citing strong AI-driven demand, including a surge in revenues at firms like Anthropic and rising hardware pricing across memory, packaging and networking.
“If AI is becoming anything as existential as defence or energy consumption, global semiconductor spending has a lot of room to grow,” the J P Morgan report noted.
The shift is also reflected in regional allocations, with J P Morgan turning overweight on Korea, China, energy, materials and financials, while remaining underweight on ASEAN and healthcare. Utilities were upgraded to neutral on AI-linked power demand, while consumer discretionary and communication services were downgraded amid weak momentum.
For India, additional pressure is coming from an estimated $64 billion pipeline of IPOs and QIPs, which is expected to absorb liquidity and cap market upside. Concerns over a weak monsoon — with the IMD forecasting rainfall at 92% of the Long Period Average amid an emerging El Niño — add another layer of uncertainty to consumption and rural demand.
Foreign investor sentiment remains fragile. HSBC warned that rupee weakness and high oil prices could trigger further outflows. “Sharp FX depreciation has weighed on returns, and as per our forex strategist, the INR is exposed to depreciation pressure if oil prices stay high. In addition, investors are increasingly focused on the potential implications of AI, particularly for software services. Together, these factors are likely to constrain foreign inflows,” said Herald van der Linde, head of Asia equity research at HSBC.
While strong domestic SIP inflows continue to provide some support, both brokerages emphasise that sustained market momentum will require a revival in foreign capital.
“We see better opportunities elsewhere in EM until valuations de-rate further or earnings visibility improves,” J P Morgan said, even as it retained selective preference for sectors such as financials, materials, consumer discretionary, hospitals, defence and power, while staying underweight on IT and pharma.
India’s long-term growth story remains intact, but in a world reshaped by war, inflation and AI disruption, patience — not positioning — may define the next phase for investors.