In wake of Pulwama attack conducted by terrorists against the Indian Army, military escalations between India and Pakistan have boosted significantly. Airstrikes were conducted by the Indian Airforce at terrorist camps in Pakistan. Pakistan Airforce attempted to retaliate but to no avail.
At such a time, tensions fly high as IAF and PAF are both flying close to the LoC, in an area which is volatile. Does this phase come across as a cause for the D-street to be worried? How are the stock markets going to react to such a situation?
Experts have the viewpoint that the impact on stock markets is going to be minimal
Let us take a brief overview of the history of tense times between the two countries in order to gauge the potential impact it could render over stock markets. If we recall prior situations of a volatile nature, such as 1998 Pokharan nuclear bomb tests and 1999 Kargil war, we figure out that the situation does render some short term and immediate effects. But long term implications are extremely unlikely and the market is sure to rebound.
Impact of Pokhran nuclear tests on stock markets
It was in 1998, on 11th and 13th May that India conducted nuclear tests in Pokhran. It took the world by a surprise. India was even targeted by sanctions by EU following the tests.
By observing the effects of the SENSEX, we come to observe that it had no negative implications whatsoever. The SENSEX lost by 7% in the 3 days that followed the tests, but recovered 5% in next 2 days.
Impact of Kargil war on Indian markets
Kargil war started on 3rd May, 1999 and 26th July, 1999 is the official end date. In this phase, SENSEX gained 38%.
With the GDP maintained at 6.5% annual growth, the war had no negative implications on the stock market.
Similarly during the Uri surgical strike, the SENSEX lost by 1.2%, but was able to recover the losses in the three sessions that followed. If we consider the Mumbai terror attacks that took place in November 2008, it took Nifty 50 six months to recover 50% when other factors took the centre stage.
There are strong reasons to believe that as an outcome of military tensions between India and Pakistan, economic impact will be marginal for India. India VIX, which is the fear gage indicator for Indian equities rose marginally by 11% to 17.12 following the airstrikes. Similarly the SENSEX lost by just 1.4% on the day following the airstrikes. On Wednesday, SENSEX stock index closed down 0.2%, above the last weeks low at 1, +0.42%. Indian rupee USDINR, +0/0212% was only marginally weaker as compared to the U.S. dollar. The rupee closed at 71.1504 on Tuesday, up from 70.9967.
Effects of tensions on Indian Equities
Investors are attempting to look past the tensions between India and Pakistan while the equities have transformed rapidly between gains and losses.
Foreign investors’ optimism towards Indian stocks remains till date. Net $487.5 million shares have been bought till now, and the month’s purchase now stands at $2.3 billion. This is the biggest inflow ever since November 2017.
In spite of that, the skirmish has come at a negatively placed time for India, wherein the country struggles against a rebound in oil prices and an uncertainty remains over the upcoming elections.
The stock market is expected to be just fine and more or less on the same lines, unless the cross border tensions escalate to a really high level. Risk money will eventually start flowing back.
Experts have sound reasons to believe that Indian stock markets have the resilience to effectively manage amidst the tension among the two nations. As the situation lightens up, real estate developers and financial companies will resume managing the liquidity issues. Crude oil prices are a factor that will play a significant role in market environment.
Equity analysts adamantly nullify the possibility of a war between the two involved countries at this point of time, because Pakistan does not have the financial muscle for a war.
Stock investors will prefer to tread with caution
Experts also believe that there may be an element of deception in the indifference that can be observed in Indian stock markets. Over the past 4 months, SENSEX has struggled to regain the losses that it had sustained in August and October last year.
After gaining 5.9% in 2018, stock index is down by 0.5% in the year so far. The surge of money into the rupee that appeared in start of November has lost pace starting mid-December. This goes to show that foreign investors are losing confidence in local equity markets.
Foreign investors are also deterred by the upcoming elections in India. The elections are likely to be a close contest and the leaders of either side will amount to increasing the tail risks that come with Geo-politics.
RBI has been facing its own share of problems. In December last year, Governor of central bank, Urjit Patel resigned and a few of the market participants believe that this lays implications on independence of central bank. Mr. Patel was replaced by Shahikanta Das, who had earlier held several positions in previous governments.
People highly knowledgeable about financial markets believe that in phases such as the one we are undertaking at present, risk premium goes on an upswing while preference for defensive sector is also higher. While opportunities still exist, valuations are stiff and corporate earnings are muted.
Role of sound stock markets tips at this juncture
There are a sufficient number of opportunities to invest in view of the volatile situation across the borders, but only a few stocks remain lucrative at this time. With the aid of a well-informed and knowledgeable stock advisory who shares lucrative share market tips, a stock investor can make sound decisions and reap maximum profits even while tensions between the countries last.
Role of an efficient stock advisor becomes all the more important at such a juncture, because de-escalations on the borders are not expected instantly, and this also lays an impact on stock market risks.