Crude oil prices will be the key driver of equities for now: Nilesh Shah

The oil market, Shah of Kotak AMC said, is signalling that supplies could get constrained again, which may lead to another increase in prices. All this will impact how equity markets play out.

The recent flaring up of tensions in West Asia made global financial markets nervous earlier this week. Nilesh Shah, managing director at Kotak Mahindra AMC, told Puneet Wadhwa over a telephonic conversation that stock market investors need to moderate their return expectations going ahead amid the recent geopolitical developments. Edited excerpts:

 

How are the markets interpreting the latest developments in West Asia? Have they overreacted?

 

I wouldn't call it an overreaction. Whenever there are signs of a settlement, the markets rally. And when fears resurface about how the situation might unfold, markets correct. This back-and-forth is natural. We should expect markets to swing like this because a lot depends on President Trump's actions and statements. Resurfacing of tensions in West Asia is likely to keep markets nervous.

 

 

Can you hazard a guess on the likely trading range?

 

It's difficult to put a range on the market for now. For the time being, the crude oil market/prices will be the key driver of equities.

 

But crude oil hasn't risen dramatically. After briefly crossing $120 a barrel, it corrected to around $68-70 following the ceasefire. Does that suggest the market isn't too worried?

 

It's not just about the price of oil; it's also about supply. The moment the market fears that oil supplies could be disrupted (in case of disruption to the Strait of Hormuz), it reacts immediately. Even the possibility of supply constraints influences sentiment i the oil market and therefore equities. 

 

So what is the oil market signalling at this point?

 

The oil market is signalling that supplies could get constrained again, which may lead to another increase in prices. All this will impact how equity markets play out.

 

But if supplies are disrupted, demand could also weaken. Is that already reflected in current prices?

 

That is exactly what the market is discounting. Lower oil supply pushes prices higher, which eventually destroys demand. That, in turn, impacts corporate earnings as well.

 

Are we looking at crude returning to $100 a barrel or even higher?

 

It's difficult to say because everything depends on developments on the ground. The extent of supply disruption will determine how much prices move. At the same time, the market has also begun to recognize that President Trump's statements don't always translate into action. As a result, market reactions have become more measured.

 

Are stock markets increasingly expecting another 'TACO' (Trump Always Chickens Out) moment?

 

That is already happening. That's why corrections are becoming progressively smaller, and recoveries are becoming quicker as well. We're seeing higher tops and higher bottoms being formed as a consequence.

 

How do you expect Q1FY27 earnings to shape up, especially after the developments in West Asia over the past quarter? How much of the bad news is already factored in?

 

The results will reflect the full impact of the West Asia conflict. We believe that largely because oil marketing companies (OMCs) are likely to report losses; overall corporate earnings growth could fall to low single digits or even turn negative. 

 

What if we exclude oil marketing companies?

 

Even then, there will be an impact. Petrochemicals, petroleum products, polymers, chemicals—the entire supply chain has been adversely affected. Excluding oil marketing companies, we expect earnings growth to be in the low single-digits for large-cap companies and in the low double-digits for small- and mid-cap companies.

 

With tensions flaring up again, is the recovery in both markets and corporate earnings getting pushed back? Earlier, there were expectations of a recovery beginning in the second quarter. Has that timeline shifted?

 

Undoubtedly, there is a delay expected in the corporate earnings recovery now. First, companies had to deal with the one-time impact of the labour code changes in the December quarter. Then came the West Asia conflict, which affected both the March and June quarters. Now, the September quarter could be influenced by the monsoon.

 

So, we are looking at four consecutive quarters being affected by different one-off factors—labour code changes, the West Asia conflict, and potentially the monsoon. Individually, each may be temporary, but together they have delayed the recovery.

 

What are your expectations from the markets for the remainder of 2026?

 

We continue to expect volatility. The oil market will remain the primary driver of equities in the near term, and investors should be prepared for significant ups and downs. Return expectations also need to be moderated. We believe returns are likely to be in the high single-digit to low double-digit range.

 

What should investors do in this environment? Is cash king, or should they start investing selectively?

 

No, I wouldn't say cash is king. Valuations are reasonable—they are not excessively expensive. This is a time to maintain a neutral allocation while investing with moderate return expectations. Investors should also keep volatility in mind. Rather than deploying all their money at once, they should invest gradually. A staggered approach is the better strategy because volatility is likely to persist.

 

Disclosure: Entities controlled by the Kotak family have a significant shareholding in 'Business Standard'.