Analysts believe that a prolonged war or tension with Pakistan following Operation Sindoor, a retaliatory attack by Indian armed forces on Pakistan and Pakistan Occupied Kashmir (PoK), could 'sink' markets. However, if the measures are limited to specific targets and tensions subside, they believe there will be a recovery in due course.
According to Aniruddha Sarkar, chief investment officer at Quest Investment Advisors, history shows that Indian markets have typically performed well during and after border conflicts with Pakistan. This time is no different.
"Despite geopolitical concerns over the last two weeks, foreign institutional investor (FII) inflows into our markets have continued, demonstrating our economic resilience to these short-term border conflicts. Any military campaign that is limited to specific targets and concludes within a few days or weeks will have no negative impact on our economy or markets. "Prolonged conflict, which appears unlikely at the moment, could have a negative impact on investor sentiment because they would prefer to be risk-averse," Sarkar said.
In the intervening night of May 6 and 7, Indian armed forces conducted strikes on terrorist infrastructure in Pakistan and Pakistan-occupied Jammu and Kashmir (PoJK) in response to the April 22 terrorist attack in Pahalgam, which killed 26 civilians.
Historically, Indian equity markets have reacted sharply to geopolitical tensions in the short term, but recovered quickly once the uncertainty has subsided.
For example, during the Kargil conflict between India and Pakistan in mid-1999, markets suffered a significant correction. However, they recovered strongly as it became clear that the conflict would be short-lived.
Ambareesh Baliga, an independent market analyst, believes that if Operation Sindoor remains localized within a band / territory with targeted strikes and concludes soon, the markets may experience a smart recovery.
"If the current conflict escalates, the market will suffer. As of now, it would be a wait-and-see strategy. "After Balakot, we saw a smart move up in the markets," he said.
U R Bhat, co-founder and director of Alphaniti Fintech, believes that the market has digested the information available so far about Operation Sindoor. He believes that more information about how Pakistan will react to the developments is required for the markets to stabilize.
"The markets are waiting with bated breath and are expected to remain volatile. While the markets have digested the available information, any escalation in tensions will send them spiraling downward. As a strategy, investors should sell rallies until there is a truce and more clarity on the situation," he said.
Within market segments, G Chokkalingam, founder and head of research at Equinomics Research, believes small- and mid-cap segments may underperform large-caps because retail investor participation appears to be low due to geopolitical developments.
"Until intense border tensions subside, we recommend a tilt toward large-caps, particularly Sensex and Nifty stocks. Of course, if there is an escalation or war with Pakistan, the entire market, including large-cap stocks, may suffer a significant decline," he warns.
