The markets stabilised after initial nervousness and apprehension about the Operation Sindoor and its impact on the market. According to a report by Kotak Mutual Fund, these conflicts have rarely derailed the long-term India story and has led to only short-term swings. Investors need to stay invested for long-term wealth creation. They specifically advise investors to refrain from panic selling and stopping SIPs.
The Kotak report stated that, “Government action suggests there is low possibility of a war. However, in case of a full-blown war, we must note that since 1950, India has seen 4 major wars. In the last major conflict (Kargil-1999), the equity markets have remained robust after an initial panic.”
They highlighted that the macro-economic factors, core earnings performance and GDP are bigger triggers for the market, “It is difficult to predict the market direction however the last major conflict have triggered temporary drawdowns before markets rebounded. Staying invested and avoiding knee-jerk decisions may be prudent for long-term wealth creation,” the Kotak Mutual Fund report added.
As the Nifty and Sensex settle down, here is a look at how the markets have performed during past military action and conflict-
Impact of Conflict on markets
Let’s look at the impact of specific events mentioned in the sources:
The surgical strikes in Uri and Balakot are most recent ones.
Balakot Airstrike (February 14-26, 2019)
The Balakot Airstrike lasted from February 14-25, 2019 The Nifty returns from the day of the day of the attack till strike was 0.8% while on the day of the strike the Benchmark yielded -0.4%. The Nifty delivered 8.9% return in the 1 year after the strike.
Uri Surgical Strike (September 18 – 28, 2016)
In 2016, during the Uri Surgical Strike by Indian Armed Forces, the Nifty returns were almost flat, down 0.3% from the day of the attack till strike and 0.4% on the specific day of the strike. The Nifty returns in the 1 year following the strike was 11.3% as per Kotak Mutual Find.
Kargil War (May 3 – July 26, 1999)
This is perhaps the last significant conflict between India-Pakistan in recent times. As per Kotak analysis, though there was some panic initially, there were no major derailment in the stock market. The market rebounded after skidding initially.
The conflict went on for a little over two months and the Nifty’s return was down 8.3% in the 1-month period before the war started. During the war, Nifty delivered 36.6% and the overall return in the 1-year after the wat was 29.4%.
Impact of Past Conflicts On Macro-Economic Variables
A look now at how the past conflicts have impacted the macro-economic scenario. Kotak Mutual Fund highlighted that “In the past conflicts, while there has been limited impact on growth, we have seen increase in inflation and fiscal deficit.”
Kargil War(1999-2000): The inflation for the financial year 1999 shot up to 5.90% and was around 3.30% in FY2000. The GDP in FY199 continued around 6.18% and went up further to 8.85% in FY2000. The Gross Fiscal Deficit expanded well above 9%.
Bangladesh Liberation War (March 26 – December 16, 1971): The FY1971 GDP reading was at 3.30% and in FY1972, the GDP was 1.19%. Inflation for both these years continued over 5.5%.
Indo-Pakistan War (August 5 – September 23, 1965): If we compare the GDP of FY1965 when the war took place and the financial year before that, the GDP reading is actually higher in FY1965 at 7.45% from 5.99% in the previous year. The Inflation however shot up to 10% in FY1965 from 6.17% in FY1964.
Sino-Indian War (October 20 – November 21, 1962): Though the war went on for about a month, the FY1962 GDP came in at 3.72% while the FY1963 GDP marginally slipped below 3%, the inflation for FY1963 shot up to 3.63% from 0.24% in FY1962.
What happens now
Kotak Mutual Fund concluded its analysis with possible scenarios and expectation going forward. They believe if it is a prolonged conflict, there could be increase in the inflation and deficit numbers and the market may correct further. A short-term conflict may however see the markets stabilise and the impact on economic parameters may be limited.
They advise investors to “not stop SIPs and avoid panic selling. Rather One may consider adding investments in a staggered way and consider top ups if possible.”