Markets in the times of war: Sharp correction and then a swift recovery

Stock market today: Events such as a war do present a buying opportunity for long-term investors, analysts said

Adversities such as war may be a good time for long-term investors who have an appetite for risk to buy their favourite stocks cheaper, say analysts. However, they need to first evaluate whether the geopolitical developments are likely to stay localised, or can escalate.

Markets, data shows, typically react with heightened volatility on expectations of any negative event / uncertainty, and even when the event unfolds. However, over time as the event unfolds, there is a realisation that the situation might get diffused, and then the rally in equity markets is much sharper.

Geopolitical risks are no different. Historically, equity markets have generally overreacted near the geopolitical risks in the near-term, but have found their feet soon.

Take for instance, Iraq invasion of Kuwait in 1990 (Gulf War) triggered a sharp correction in the markets and oil prices had doubled back then. Equities markets, however, were back to 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 as realization dwelled that this would be a short-lasting conflict.

In the last few trading sessions, global equity markets, including India, have borne the brunt of an escalation in geopolitical tensions in West Asia, which in turn triggered a 5 per cent rise in Brent crude oil prices to around $75 a barrel.

"Events such as a war do present a buying opportunity for long-term investors. That said, one needs to evaluate if the latest developments will be short-lived or will the situation get worse. Even with the Israel - Palestine conflict, the markets had dropped sharply initially, but bounced back quickly as they realised that the developments will remain localised. Even now, investors are not bothered about the war, but are more concerned whether it will remain localized or not. In case things are contained, markets can stage a bounce back in the next few days," said Ambareesh Baliga, an independent market expert.

The next few weeks, however, could be trying for the markets as they look forward to the outcome of the state elections back home amid the September 2024 (Q2-FY25) earnings season, monetary policy of the Reserve Bank of India. At the global level, the outcome of the US presidential polls will be a key monitorable, besides the crude oil price trajectory.