Global markets have entered a phase where geopolitical developments, rather than economic fundamentals, are driving short-term price movements, with the evolving US-Iran conflict emerging as the key variable, according to Harish Krishnan, Chief Investment Officer – Equity at Aditya Birla Sun Life AMC Ltd. 

Krishnan said markets are receiving mixed signals, with intermittent hopes of de-escalation offset by rising risks of tactical military escalation. “Despite elevated uncertainty, risk assets have shown resilience, reflecting a market that continues to price in a relatively swift resolution,” he said. 

US equity indices have rebounded sharply while oil markets remain in backwardation, suggesting investors expect near-term disruption rather than a prolonged supply shock. 

According to Krishnan, the key swing factor remains the Strait of Hormuz, a critical shipping route for global crude supplies. A prolonged closure could trigger extreme oil price spikes beyond historical precedents, while a controlled reopening would quickly normalize supply conditions. “Current pricing suggests markets are anchored to the latter outcome,” he said. 

Krishnan noted that past geopolitical conflicts have generally disrupted commodity markets but rarely caused lasting damage to global growth. Lower energy intensity in modern economies provides a structural cushion, though it also means oil prices may need to rise further before significantly curbing demand. 

US Fed faces policy dilemma 

On monetary policy, Krishnan said the US Federal Reserve faces a difficult balancing act. Higher oil prices risk reigniting inflation and limiting room for interest rate cuts, even as labour market indicators soften. 

He added that uncertainty around leadership transitions at the Fed could further delay clear policy guidance. 

India hit by external shock 

Indian equities saw a sharp correction in March, driven largely by the surge in crude oil prices and its spillover effects on the domestic economy. 

Krishnan said higher oil prices, rupee depreciation, rising bond yields, and record foreign institutional investor outflows combined to create a synchronized tightening of financial conditions. “This marks a transition from a policy-supported recovery phase to a geopolitically driven risk-off regime,” he said. 

Growth expectations have moderated, inflation risks have increased, and external balances have weakened, reversing the constructive macro trend seen earlier in the year. Despite the external shock, Krishnan said India’s structural growth story remains intact. 

He pointed to resilient domestic demand, continued manufacturing momentum, and financial sector strength, supported by recent GDP growth data and corporate earnings trends prior to the recent volatility. 

Shift in market regime 

Krishnan said March market behaviour signals a decisive shift from a liquidity-driven rally to a more selective, earnings-led market environment. The broad-based correction, weaker market breadth, and rise in volatility suggest indiscriminate gains are over, while foreign investors have turned aggressive sellers. Although domestic inflows remain supportive, they are no longer enough to fully offset foreign selling, reducing the liquidity cushion for markets.