Where should place your bets in Indian markets? Bernstein has recommendations

Following six weeks of severe hostilities that disrupted global oil and gas supply, Iran and the US agreed to a two-week ceasefire. While the risk of the conflict restarting remains, brokerage firm Bernstein sees this as the beginning of an off-ramp and outlines how investors can position in this phase.

The brokerage believes that an end to hostilities could trigger a gradual reversal across several segments, particularly those that were heavily sold due to foreign institutional investor (FII) outflows. Financials, it said, remain a longer-term play in this recovery cycle.

A short-term reprieve is likely across sectors that are highly sensitive to crude prices, including chemicals, aviation, logistics, paints, pharmaceuticals, and, to an extent, energy stocks such as oil marketing companies.

Bernstein said it would play the rebound through financials as a more durable theme, while tactically taking exposure to the most impacted segments, including Middle East and North Africa-exposed construction and related sectors.

It expects oil marketing companies, travel, chemicals, paints, and construction to see a short-lived rebound over the next few sessions.

The brokerage remains neutral on the Nifty, with a year-end target of 26,000, implying a 12% upside from current levels.

FII flows and crude outlook

Bernstein said it does not see a strong case for FIIs to return in large numbers, nor for crude prices to decline materially below $85 to $90 in the near term. However, the end of escalatory phases is a positive development that could prevent further deterioration.

This also gives the government some room to address internal economic challenges, including the risk of a weak monsoon due to a potential Super El Nino, as well as the impact of elevated crude prices on the fiscal position.

For India, Bernstein said the country needs to diversify its energy mix away from crude oil and natural gas and move towards a more focused electrification of the economy.

The push towards electric vehicles is expected to accelerate, even as supply-chain risks persist, with greater emphasis on securing critical minerals and expanding electricity generation capacity, including coal, if required.