How Do Conflicts Impact the Stock Markets: What Should an Investor Do?
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Financial markets have always been sensitive to geopolitical developments, particularly those involving military or cross-border tensions. Investor behaviour in volatile times often reflects a tug-of-war between risk aversion and opportunity seeking.
While the human loss is truly devastating, some uncertain events can also shake up the financial world in many ways.
In this article, we’ll explore how uncertainty impacts investor behaviour, which sectors tend to benefit during volatile periods, and what strategies can help you navigate market turbulence with a long-term perspective.
How Do Markets React in the Short Term?
Markets often react sharply to geopolitical tensions, showing familiar short-term patterns:
- Volatility Spikes: Stock markets often react with sharp declines or increased volatility at the onset of conflict, reflecting uncertainty about future economic and political outcomes.
- Flight to Safety: Investors typically move capital from riskier assets (like equities) to perceived safe havens such as government bonds, gold, etc.
- Sector Divergence: Certain sectors, like defence, energy, and commodities, may benefit or remain resilient, while others, such as tourism, airlines, and luxury goods tend to suffer.
In the long run, this pattern corrects itself as the situation de-escalates and the market improves. During this time, investors should keep their long-term goals in focus, avoid panic, and stay safe.
Sectoral Impact of Border Tension
While the general market environment may be turbulent, conflicts can also create opportunities in specific sectors.
Defence and Aerospace
Increased government focus on national security, higher defence budgets, and expectations of new contracts for equipment drive demand for defence-related companies.
Telecommunications and Cybersecurity
With a greater emphasis on secure communications and data protection during sensitive periods, firms specialising in telecommunications infrastructure and cybersecurity solutions can experience heightened demand.
Oil & Energy
Global crude oil prices often surge during periods of geopolitical tension, and this situation follows the same trend. For a country like India, which heavily depends on oil imports, this brings mixed outcomes.
Companies involved in oil exploration and production typically see improved profitability when crude prices rise. On the other hand, companies importing oil often come under pressure.
Despite increasing input costs, oil companies are usually expected to maintain stable retail prices, particularly during delicate or high-stakes periods, which can be tricky.
Travel and Hospitality
These sectors typically experience a decline, as individuals and businesses avoid discretionary travel and tourism during uncertain times. Airlines, hotels, and related services often see cancellations and reduced bookings, and may also be subject to regulatory interventions such as price caps.
Historical Patterns: How Much Do Markets Really Fall?
In the last two decades, Indian equity markets have seen multiple episodes of cross-border tensions and terror-related events. The common thread across most of these episodes has been a short-term correction followed by a recovery.
For example, in subsequent episodes of tension and attacks (such as those in the early 2000s and late 2010s), markets have generally shown only modest, short-term corrections, typically ranging from 1% to 5%, with quick recoveries once uncertainty eased.
If we zoom out and consider the global perspective, equity markets tend to correct by around 7% during major conflicts. However, the median correction is closer to 3%. India’s markets, in contrast, have typically seen corrections of no more than 2% during periods of high geopolitical tension, demonstrating the relative stability and confidence in the country's economic strength during such crises.
Analysts believe that even if things get really bad, the market might only drop by 5-10% at most. This suggests that while these tensions could cause some temporary ups and downs in the market, the overall long-term outlook for Indian markets isn't expected to change much because of these events.
What Should Investors Do?
Investors facing the current geopolitical tensions should adopt a measured and strategic approach:
- Stay Invested: Historically, the Indian stock market tends to recover quickly after major events, continuing its upward trend. Avoiding the market during these times could lead to missing out on potential gains.
- Diversify Your Portfolio: Geopolitical tension makes diversification even more crucial. A mix of assets across sectors in Nifty 50 or Nifty Next 50 and regions helps reduce risk and shield investments from market fluctuations.
- Maintain a Long-Term Perspective: Staying disciplined and aligned with your financial goals helps navigate market fluctuations caused by geopolitical events effectively.
- Include Safe-Haven Assets: Allocating part of the portfolio to safer assets like gold and government bonds can provide stability during periods of heightened volatility. They have a lower correlation to the equity market and thus are not affected by market volatility.
Conclusion
While the stock market may react sharply in the short term when tensions rise, it's the broader market trends and fundamentals that truly drive long-term outcomes. For investors, the key is to stay calm, avoid making impulsive decisions, and keep an eye on the bigger picture. History shows that India’s stock market is resilient, bouncing back even after difficult times. Those who stay invested through the ups and downs often find themselves rewarded when the market recovers.
Disclaimer: No Business Standard Journalist was involved in creation of this content
Topics : IAF air strike
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First Published: May 14 2025 | 10:07 AM IST
