Ukraine war and Markets: Knee-jerk reaction or sustained selling?

The past few weeks have been a trying phase for equity markets globally, as they have battled several headwinds, including the recent geopolitical conflict between Russia and Ukraine that has triggered a sharp rise in the prices of commodities, especially crude oil.

Analysts say the fall was a knee-jerk reaction to the Russia-Ukraine conflict and markets were likely to witness a choppy phase before discounting this development and staging a sharp rebound. Historically, equity markets have generally overreacted to geopolitical risks. 

Iran’s invasion of Kuwait in 1990 triggered a sharp correction in markets, and oil prices doubled. The equity markets, however, returned to the peak level four months later. 

Back home, the Kargil confrontation between India and Pakistan also saw a sharp correction in the markets in mid-1999. However, markets rallied sharply after realizing that this would be a short conflict.

It is very evident here that markets typically react with heightened volatility on expectations of a negative event, and even when the event unfolds. But as events unfold over time, there is a realisation that the situation might get diffused. The rally in equity markets then is much sharper.

Yet, analysts are hopeful that the markets will recover their lost ground and trend higher after more clarity on how these events are progressing.

Sunil Singhania, founder of Abakkus Asset Manager said, “We expect the Russian / Ukraine standoff to continue in some form or other, and one should closely track the developments. However, the investment decision has to be taken based on the fundamental and economic scenario both in India and globally” 

“We expect the Russia-Ukraine standoff to continue in some form or other, and one should closely track the developments. However, the investment decision has to be taken based on the fundamental and economic scenario both in India and globally,” he said.

The worst seems to be discounted and though we might not have a sharp V-shaped movement, markets should start to move into positive trajectory, said Singhania. 

The markets corrected sharply in February with the S&P BSE Sensex and the Nifty50 indices slipping around 5 per cent each. The fall in the mid-and small-caps, which have lost over 6 per cent and 10 per cent, respectively, during this period, has been sharper, ACE Equity data show.

While the near-term scenario will continue to be choppy, analysts said that the current correction provided an interesting entry opportunity for long-term investors. 

However, they must be mindful of the inflationary impact on corporate earnings, which might see some pressure over the next few quarters, they cautioned.

On Tuesday, markets will remain closed on account of Mahashivratri. On Wednesday, however, besides tracking global developments, markets in India will also react to the GDP data announced after market hours on Monday. Stock-specific action based on news flow is likely to continue.