Operation Sindoor: Prolonged strikes can sink markets, say analysts

A prolonged war / tension with Pakistan post Operation Sindoor – the retaliatory attack by Indian armed forces on Pakistan and Pakistan Occupied Kashmir (PoK) – could ‘sink’ markets, suggest analysts. However, they could see a recovery in due course if the measures are limited only to select targets and the tensions de-escalate, they said.

 

History, Aniruddha Sarkar, chief investment officer at Quest Investment Advisors said, suggests that Indian markets have most of the times done well during and even after any conflict with Pakistan on the borders. This time is no different. 

 

“Though the geopolitical concerns have been there for the last two weeks, yet foreign institutional investor (FII) inflows continued into our markets, which is a stamp of our economic resilience to these short-term border conflicts. Any military campaign which would be limited to selected targets and be over within a few days or weeks, would not have any negative impact on our economy or markets. Prolonged conflict, which seems unlikely at this moment, could impact investor sentiment negatively as they would prefer a risk off mode,” Sarkar said.

 

In the intervening night of May 6 and May 7, Indian armed forces carried out strikes on terrorist infrastructure in Pakistan and Pakistan-occupied Jammu and Kashmir (PoJK) in response to the terrorist attack in Pahalgam on April 22 that left 26 civilians dead.

 

Historically, Indian equity markets have typically reacted sharply to geopolitical tensions in the short-term as a knee-jerk, but recovered quickly once uncertainties subsided.

 

For example, during the Kargil conflict between India and Pakistan in mid-1999, markets experienced a significant correction. However, they rebounded strongly as it became evident that the conflict would be short-lived. 

 

Ambareesh Baliga, an independent market analyst, too, feels that if Operation Sindoor remains localised within a band / territory with targeted strikes and ends soon, the markets could witness a smart recovery.

 

“In case the current conflict widens, the uncertainty will sink the market. As of now it would be a wait-and-watch strategy. Post Balakot also, we witnessed a smart move up in the markets,” he said.

 

The information available till now on Operation Sindoor has been digested by the markets, feels U R Bhat, co-founder & director, Alphaniti Fintech. For the markets to stabilize, he feels, more information is needed on how Pakistan is likely to react to the developments. 

 

"The markets are waiting with bated breath and are likely to remain volatile. While the available information has been digested by the markets, any escalation in the tensions will see them spiral down. As a strategy, investors should sell the rallies till there is truce and more clarity on the developments," he said.

 

Within the market segments, G Chokkalingam, founder and head of research at Equinomics Research, said small-and mid-cap segments may underperform the large-caps as retail investors’ participation seems to be weak due to geopolitical developments.

 

"Till intense tensions on border moderates, we suggest some tilt towards large-caps, especially the Sensex and Nifty stocks.  Of course, if there is any escalation or war with Pakistan, then the whole market, including large-caps may see a substantial fall," he warns.