How markets react to conflicts between India and Pakistan2 min read . Updated: 27 Feb 2019, 08:45 AM IST
- Conflicts in the past have seen mixed market reactions
- The markets become volatile in the short-term
In the war strategy classic, The Art of War, Sun Tzu said that “the one who wishes to fight must first count the cost."
Certainly, what happens at the border has vast repercussions, including on stock market. The stock market’s response to the Indian Air Force’s attacks on Tuesday was reactionary at first, but it showed a sharp recovery later in the day.
The Nifty 50 corrected 1.5% intraday on Tuesday, but closed 0.41% lower. Consequently, the NSE’s fear gauge, the India Volatility Index (VIX) jumped nearly 18% during the day to 18.10, and closed lower at 17.05.
Such conflicts in the past have seen mixed market reactions. As the chart alongside shows, the impact of previous such events lasted only for a few days. During the Mumbai terror attacks in November 2008, the Nifty 50 recovered 50% in six months, as other factors took centre-stage.
“The markets become volatile in the short-term, and it is part of the cycle. We have seen during the surgical strikes, Kargil war, but then it is the fundamentals that come back into play. This time it is going to be no different," Ashwani Bhatia, managing director and chief executive officer, SBI Asset Management Company said.
While equity analysts do not foresee a full-fledged war, they caution that the expiry of February futures contracts, due this week, could lead to further downsides.
“Economically we don’t see much impact; this is only short-term sentiment. Practically, Pakistan cannot afford a war with India; for example in the Kargil war India spent about $6-7 billion in today’s currency and Pakistan’s forex reserve is $6 billion.
They don’t have the financial muscle to do it. Today, we saw some long unwinding happening in the morning but no significant shorts have been created. Positions in the market seem light, Nifty may not be able to cross 10,900 in this expiry.
We expect some more pressure to set in and the Nifty may correct further to 10,700," Sahil Kapoor, chief market strategist, Research, Edelweiss Wealth Management said.
However, in case the conflict prolongs, market analysts see a 3-5% correction from these levels. The impact of this could be more acute on smaller and mid-sized companies, while the larger companies could remain relatively less impacted, as investors move towards safety.
“Typically, in periods like these, the risk premium goes up and preference for defensive sectors also goes up," Gautam Duggad, head of research institutional equities, Motilal Oswal Financial Services added.
Interestingly, Sun Tzu also believed that in the midst of chaos, there is opportunity. But given that valuations are stiff, corporate earnings are muted and Indian markets are entering the election season, investors may just be fence-sitting for now.