Synopsis

The Central Theme: A Middle East Conflict-Led Stagflationary Shock

The report is framed around the outbreak of a Middle East conflict that has disrupted global energy markets, with nearly 20 million barrels of petroleum products transiting the Strait of Hormuz daily. This has shifted the macro narrative from one of cautious optimism to a dual shock of slower growth and higher inflation.

Global Outlook

Global GDP growth is projected to slow to 2.9% in CY26 from 3.3% in CY25. Asia-Pacific is seen as the most vulnerable region, with growth expected to decelerate to ~4% from 4.5%, given its heavy dependence on Middle Eastern energy. Manufacturing PMIs declined across major economies in March 2026. The shock is characterised as a pure supply shock — unlike COVID or the Russia-Ukraine conflict — meaning monetary policy cannot readily offset it.

India-Specific Impact

India faces meaningful but not catastrophic exposure. Around 46% of crude imports and 55% of LNG imports are linked to Gulf/Hormuz supplies, and GCC remittances amount to ~USD 40 billion annually. Indian crude prices rose over 100% year-on-year, reaching USD 157/bbl in March 2026. FY27 GDP growth forecasts have been revised down to 6.0–6.5% by most forecasters (though S&P raised its estimate to ~7.1%). The report notes that every USD 10 rise in crude is estimated to push CPI up by ~40–60 basis points, and could widen the current account deficit above 2% if crude sustains above USD 100/bbl.

On the positive side, India's starting position is relatively comfortable — low inflation (CPI was 3.2% in February 2026), a low fiscal deficit, a low current account deficit (1.3% in Q3FY26), and adequate forex reserves. The GOI has announced an Economic Stabilisation Fund of Rs. 57,381 crore and other export-support measures. The INR, now at a 13-year real effective low, is seen as a potential tailwind for exports.

Inflation and Rates

The global rate-cutting cycle is seen as largely over. Swap markets are pricing in two RBI rate hikes in CY26, though the report views immediate hikes as premature given that CPI remains below 4%. Bond yields have hardened across the curve. RBI policy flexibility has narrowed, and long-duration bonds are advised against.

Equity Valuations and Earnings

After a strong Q3FY26 earnings rebound, FY27 earnings expectations now carry significant downside risk. The Nifty is trading below the –1 standard deviation of its 5-year average PE (~17.7x vs. average ~19.6x), making large caps increasingly attractive from a medium-term perspective. Small caps remain somewhat above historical averages. FIIs sold a record ~USD 13 billion in March 2026, exceeding cumulative inflows over the prior 12 months. Domestic equity mutual fund flows, however, have remained steady at ~INR 25,000 crore per month, with SIPs holding at ~INR 30,000 crore.

Portfolio Strategy

For equities, the report recommends gradually building positions, given that the short-term damage has compressed much of the anticipated de-rating. A large-cap tilt is preferred, with diversification across styles and market caps. Sector preferences include renewables, power, utilities, select manufacturing, metals, and capital goods — sectors aligned with the global HALO (Hard Assets, Local Manufacturing, and Old Economy) narrative. The report also favours EM equity diversification (via the Whiteoak GEM Ex-India fund) as an INR hedge.

For fixed income, the advice is to focus on short- to medium-duration, high-quality accrual strategies and avoid the long end of the curve. Target maturity funds and index funds in the 3–18 month range are highlighted. Private credit (structured debt AIFs) is viewed constructively given India's structurally different private credit market.

Gold is recommended as a strategic allocation, given elevated inflation and geopolitical uncertainty.

Bottom Line

The report's closing message is captured well in the Howard Marks quote it opens with: "You can't predict. You can prepare." The crisis has pushed back India's earnings recovery by one to two quarters but is not seen as derailing the medium-term growth story. Portfolios should be more diversified, defensively positioned in the near term, yet gradually deployed into equity on dips — because every crisis, as the report notes, also presents an opportunity.