Markets rule out war at this stage, say analysts

In case there is a geopolitical event, India will be seen as a relative safe haven within the Asian region, analysts suggest

Most Asian markets have given a muted response to North Korea firing another ballistic missile over Japan on Friday. While the Nikkei 225 and Hang Seng indices posted modest gains – up 0.3% - 0.5%, Straits Times, Kospi and the Shanghai Composite slipped up to 0.3%. Back home, the S&P BSE Sensex and the Nifty50 were also trading lower by around 0.2% each.

It was the 15th missile test by North Korea this year and the first since North Korea detonated its most powerful nuclear bomb to date on September 3, reports suggest.

Markets, analysts say, have given such a response to the development as they rule out a full-fledged war. Christopher Wood, managing director and equity strategist at CLSA, for instance, believes the United States (US) will, sooner or later, likely have to accept the reality that North Korea has become a nuclear power and adjust its policy accordingly towards a focus on containment. 

“Voices in Washington are already beginning to make this point in public," he wrote in his recent weekly note, GREED & fear.

Going ahead, most analysts feel that the threat to stability for the Indian equity markets is mostly from the global geopolitical situation that can see the markets perform in tandem with peers. That said, the reaction, however, they feel will be short-lived and investors should use any decline to buy stocks from a medium-to-long term perspective.

"In case there is a geopolitical event, India will be seen as a relative safe haven within the Asian region, says Sandeep Bhatia, managing director and head, Macquarie Securities India.

G Chokkalingam, founder and managing director of Equinomics Research & Advisory, too, believes that the subdued reaction by the global financial markets to the event is only due to the fact that they rule out a full-fledged nuclear war at this stage.

“No one wants war and the markets, too, are ruling out the possibility at this stage. These developments have been going on since the past few weeks and the situation will take a few more weeks to get sorted. There are other moving parts / variables that need to be taken into account for the markets to chalk out their future trajectory. I suggest investors stock with quality large-cap names. As a portfolio strategy, they would be better off keeping around 30% in cash and around 50% deployed in good large-cap names,” Chokkalingam advises.

Besides the developing geopolitical situation, analysts say the markets will be keeping an eye on the upcoming September quarter results season to assess the impact of goods and services tax (GST) implementation on corporate earnings and the macro-economic data.

Despite a near 20% rise in the markets in calendar year 2017 (CY17), Credit Suisse remains optimistic on the road ahead and sees no major downside, unless global cues disappoint. In its 'India Market Strategy' report released Wednesday, the global research and brokerage house expects domestic flows to remain robust thanks to improvement in financial savings and support the market on every correction.

On a more macro view, Credit Suisse remains concerned on the muted economic growth - as reflected by the drop in demand for oil, cement, power and truck rentals. It also believes the impact of the goods and services tax (GST) on tax collection and overall economy is still unknown. CLICK HERE FOR THE FULL REPORT