War & markets: Sharp recovery post a steep fall? History does suggest so

It has been a trying phase for the global equity markets over the past few weeks as they have battled several headwinds, including the recent geopolitical conflict between Russia and Ukraine that has also triggered a sharp rise in commodity prices.

Analysts say the market fall was a knee-jerk reaction to the Russia – Ukraine conflict and are likely to witness a choppy phase before discounting this development and staging a sharp rebound. Over time, equity markets have generally overreacted near the geopolitical risks. CLICK HERE FOR THE CHART

The Iraq invasion of Kuwait in 1990 triggered a sharp correction in the markets and oil prices doubled. Equities markets, however, were back to peak level four months later. Closer home, the Kargil confrontation between India and Pakistan also saw a sharp correction in the markets in mid-1999. However, markets rallied sharply as realization dwelled that this would be a short-lasting conflict.

This time around, however, there are multiple moving parts that investors need to track, such as the outcome of the state elections back home, initial public offer of Life Insurance Corporation of India (LIC) that may impact the available liquidity and the possible rate hikes by global central banks, especially the US Federal Reserve (US Fed). Yet, analysts are hopeful that the markets will recover lost ground and trend higher once more clarity on how these events are progressing emerges.

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

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 that have lost over 6 per cent and 10 per cent during this period has been sharper, ACE Equity data show.

"The recovery can be equally swift and that's what we saw last week as well. That said, even if the markets go up, they may be unable to sustain at higher levels till March-end. Retail investors have lost a lot of money in IPOs of new-age companies and may book losses in such stocks towards the financial-year end. Mid-and small-caps can continue to remain weak till the fourth week of March," said G Chokkalingam, founder and chief investment officer, Equinomics Research.

While the near-term scenario will continue to be choppy, analysts said that the current correction provides an interesting entry opportunity for long-term investors. However, they must be mindful of the inflationary impact on corporate earnings, which may see some pressure over the next few quarters, they caution.

"There is a high chance of at least 20 per cent downgrade in forward EPS (earnings per share) over the next 12-24 months. Historically, sectors that saw high vulnerability are Industrials, Infrastructure, Cement, PSU banks, Autos, real estate and telecom. Sectors that are less vulnerable are private banks, consumer staples, pharma, Utilities, Upstream Oil & Gas, and information technology (IT). We would consider metals to be vulnerable to global factors emanating from the Chinese slowdown, the fallout of stagflation in US and Europe and the spillover impact of the Russia-Ukraine conflict," said Dhananjay Sinha, managing director & chief strategist at JM Financial.