Indo-Pak conflict: Markets will recover after knee-jerk reaction, say analysts

The impact, analysts say, has been magnified given that Thursday was the last day of settlement for the derivative contracts

India’s retaliation to the recent terror attacks by Pakistan in the form of precision strikes across the Line of Control (LOC) rattled markets on Thursday, with the S&P BSE Sensex tumbling over 500 points in intra-day deals. The BSE benchmark hit a low of 27,719 during the day, while the Nifty50 index slumped nearly 2% intra-day to hit a low of 8,558.

They, however, managed to recover some lost ground, and ended the day at 27,827 (Sensex) and 8,591 (Nifty50) levels respectively, translating into a fall of around 1.7% each.

Also Read: Indian Army's cross-LoC raid: Reading the fine print

Though the markets have given a knee-jerk reaction to the development, analysts do not expect the geopolitical situation to spin out of control. The markets, they say, will take the developments in their stride and are likely to recover soon. Though in the near-term, they do caution against volatility.

“I don’t think there will be any long-term implication for the markets. Given historical instances such as 1998 (nuclear capability test by India in Pokhran) and the Kargil war in 1999 where India – Pakistan relations hit nadir, markets do take such developments negatively in the near term. In the medium-to-long term, however, there is no meaningful impact,” says Tirthankar Patnaik, India Strategist at Japan-based Mizuho Bank.

The impact, analysts say, has been magnified given the fact that today is the last day of settlement for the derivative contracts (F&O) for September series, and hence investors are nervous rolling over their positions to the next series given the geopolitical development. 

“The markets, in my view, have already given a sharp reaction and I do not see the Nifty dip to 8,500 levels,” Patnaik adds.

Evidence suggests that the market recovery after such geopolitical shocks has been quite swift. For instance, the S&P BSE Sensex dipped nearly 4% from 17,165 levels on September 8, 2011 – a day ahead of the ‘9/11 attacks’ on the US soil – to 16,501 levels on September 12, 1999. The index made a gradual recovery to 16958 levels by October 12, 1999.

"Markets may remain under pressure over uncertainty about geopolitical situation between two countries and adopt a wait-and-watch approach in the short-term," said Dinesh Thakkar, chairman & managing director at Angel Broking.

"It is pertinent to note that during 1999 Kargil war, markets eventually bounced back with more than 13% gains between the start to the end of the war. In my view, once the current issue also de-escalates, the markets will revert back to its fundamentals which remain strong for India,” he adds.

Following the US invasion of Iraq on March 20, 2003, the Sensex tanked nearly 2.5% from 3,218 levels, and regained lost ground over the next few months.

A similar knee-jerk reaction seen between May 8 and May 14 when the Indian Defence Research and Development Organisation (DRDO) and Atomic Energy Commission (AEC) conducted five nuclear tests, dubbed "Pokhran-II". The move saw the Sensex slip around 6.8% to 3,897 levels as India carried out the tests.

“It is too early to say whether both countries will use strategic weapons and we will have a full-scale war. The base-case scenario for the markets is that there will be some more tension across the LoC in the days ahead, which could evoke a knee-jerk reaction in the markets, but they are likely to take it in their stride over the medium-to-long term,” said U R Bhat, managing director, Dalton Capital Advisors.

"We expect the volatility to remain high for next few days, as situation gets clearer on the Indo-Pak front. This, however, is a good opportunity for accumulating select stocks where earnings visibility is high, fundamentals are supportive and only expensive valuations were the concern," advises Gautam Duggad, head- research, Motilal Oswal Securities in a note.