Shares of Indian defence companies were in focus on Tuesday as tensions in the Middle East escalated following reports around the death of Iran’s Supreme Leader, Ali Khamenei, raising expectations of higher export opportunities and improved investor sentiment for the sector.Fresh strikes by the US and Israel, followed by retaliation from Iran, have heightened geopolitical uncertainty. The developments come days after Prime Minister Narendra Modi visited Israel in late February, where both sides reiterated their commitment to deepen defence ties.In a joint statement, India and Israel agreed to pursue joint development, production and technology transfer in defence manufacturing. The two nations also discussed fast-tracking a bilateral trade agreement, expanding cooperation under the UPI digital payments framework, and strengthening collaboration in space and emerging technologies.

War in the Middle East escalates

86-year-old Ali Khamenei was killed over the weekend in missile strikes by the US and Israel. Four members of his family, including his daughter and a grandchild, were also reported killed. Iran has since retaliated with strikes on multiple countries in the region, escalating geopolitical tensions further.

Brokerage firm JM Financial believes Indian defence names such as Hindustan Aeronautics Limited (HAL) and Bharat Electronics Limited (BEL) could see sentiment support, even as elevated volatility persists amid a broader global risk-off mood in domestic equities.

Defence stocks have witnessed sharp swings in recent months. After Indian armed forces carried out targeted operations against terrorist outfits in Pakistan and Pakistan-occupied Kashmir, the sector saw a strong rally last year. However, the momentum faded due to a lack of fresh triggers.

So far in 2026, HAL shares have declined by over 11%, while Bharat Dynamics Limited (BDL) has fallen by around 15%, reflecting the recent cooling in the segment.

Dalal Street in red?

While defence stocks may see a sharp uptick amid escalating tensions, the broader market is likely to remain under pressure.Sunny Agrawal, Head of Fundamental Retail Research at SBI Securities, termed the rising geopolitical tensions a marginal negative for markets and does not expect a sharp knee-jerk reaction. According to him, news around the death of Ali Khamenei and the possibility of retaliation could lead to a minor gap-down opening on Monday. “After that, the uncertainties should normalise,” he said, adding that crude oil prices will be the key monitorable.

If oil prices remain stable, Agrawal believes the market reaction could be limited, with the longer-term trajectory hinging on further geopolitical developments.

Kranthi Bathini of WealthMills Securities said the expanding tensions in the Middle East, particularly involving the UAE, were largely unexpected and could negatively impact financial markets in the short to medium term. However, he too underscored that crude oil’s movement would be critical for Indian equities.

“Markets are already in a downturn driven by multiple factors. The war will likely have a short-to-medium term impact, but not a long-term structural effect,” he added, pointing to India’s relatively strong domestic fundamentals.

Nachiketa Sawrikar, Fund Manager at Artha Bharat Global Multiplier Fund, noted that global equities were already fragile in February, with the S&P 500 and the Nasdaq Composite declining in the US, while India’s Nifty 50 remains down on a year-to-date basis.

“Against this backdrop, a US and Israel attack on Iran would likely trigger broad selling of risky assets across developed and emerging markets,” he said.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times.)