Web Exclusive
Equities remain the best investment bet even during cross border tensions

When tensions were escalating between India and Pakistan, the stock market remained largely unperturbed. On February 26, when India bombed Balakot in Pakistan, the Sensex dropped 0.7 per cent. It fell marginally further a day later, when the Pakistan Air Force tried to target Indian military installations, but failed. There was no significant fall in the markets even though the chatter of war between the two countries was rising.

But this behaviour of the country’s stock market is not unusual. If you look at past war or military standoffs between India and its neighbours, escalating tensions didn't usually impact the stock markets significantly (See table). For the entire period of the Kargil War, which lasted for over two and a half months, the Sensex gained 39.1 per cent. According to a report by Soumya Kanti Ghosh, group chief economic adviser, State Bank of India, during Kargil, the leading indices of Indian stock markets declined initially, but recovered strongly after that. The economy grew at the same pace in 1999-2000 as the year before – a healthy 6.5 per cent. “Clearly, for India, historical evidence shows that geopolitical risks do not translate into political risks,” says the report.

Similarly, post the surgical strike, the leading indices of Indian stock markets declined for a few months but recovered thereafter. The Sensex and Nifty had shed 1,462 points and 491 points respectively in the three months following the strike, but recovered later and ended higher by 3,456 points and 1,198 points respectively a year after the strike. After one year, the rupee had appreciated by 2.36 per cent against the US dollar, while 10-year government securities moderated by 20 basis points. The overall impact of the Uri surgical strike war was positive for the market.

Market experts believe that the same holds true even for the current events. “The market knew that the tensions would not escalate into a full-fledged war as both countries have nuclear weapons. Also, Pakistan didn’t receive support from China, which further affirmed the belief that the escalation of tensions between the two countries will be limited,” says G Chokkalingam, CEO, Equinomics Research and Advisory.

War has its consequences: It isn’t as if war has no correlation with the stock market. In India's case, the markets have recovered during military tensions as there was a belief that the country will not go for a full-fledged war during those events. A full-fledged war can, however, wipe out years and even decades of economic growth.

Typically, during the war economy, businesses and production take a huge hit. The currency of the country depreciates steeply and inflation rises. International investors pull out money and stay away. Consequently, an investor’s portfolio can take a severe hit.

Equities work even during war: In his book Wealth, War & Wisdom, former Morgan Stanley strategist Barton Biggs, has explored how the investors' wealth in times of war. According to his analysis, stocks are a better bet for protecting wealth if an investor is willing to stay invested for the long term. Even in countries losing the war, stocks have managed to give returns higher than inflation. He also says that its best to invest in an index fund that provides you with the required diversification instead of direct exposure to a few select stocks.

In the case of military tensions then, equities would remain the best option for investors. “The way countries wage war has changed. Bigger economies don’t go for a full-fledged war,” says Chokkalingam.

Invest overseas for diversification: Investors with a significant corpus should invest abroad for geographical diversification or for diversifying the portfolio. In case of war or military tensions, this will help to preserve at least a part of the portfolio.

One of the best ways to invest abroad is by using international funds available in the country. Direct investment in stocks abroad is also possible, but it comes with a lot of paperwork, and an average investor has neither the time nor expertise to study local businesses in any detail.

One can explore the option of investing in developed economies such as the US, the UK, Japan or European countries that don't have a correlation with the Indian stock market. Emerging markets can be avoided as their stock markets have a higher correlation with the country's stock market. 

Gold preserves wealth: The yellow metal works as an asset to preserve wealth. During the war, when the currency takes a beating and inflation rises, gold can protect wealth. But the rise in gold prices is governed by many factors. An investor may not see stellar returns from it.

Debt and property: During war, if an investor is looking at safer options, a bank fixed deposit (FD) will be a safer bet than a debt mutual fund or papers issued by a company. An investor would have a better chance of recovering money from a bank FD. Debt funds or company papers would turn volatile, and their returns would depend on the outcome of the war and its economic impact.

What happens to an investor’s property investment during war depends on many factors. There’s no straight answer. During war, the government’s policies can make property investments unattractive. There’s also lack of investment appetite during and after the war for large assets like property, and it could take years or decades for property price recovery.

A larger allocation to equity and gold with a long-term horizon, therefore, remain the best options for wealth preservation during tough times like war.

Impact of conflicts on the market
Conflict      ' Start Date End Date  
Kargil war      ' May 03, 1999 July 26, 1999 % change
Sensex 3,325.7    4,625.4 39.1
Operation Parakram         ' Dec 13, 2001 June 10, 2002 % change
Sensex 3,412.2     3,279.5 -3.9
Doklam Standoff . June 16, 2017 Aug 28, 2017 % change
Sensex 31,075.7          31,750.8 2.2
Surgical Strike    . Sep 29, 2016 Sep 29, 2016 % change
Sensex 28,292.8  27,827.5 -1.6
Pulwama Attack        . Feb 14, 2019 Feb 28, 2019 % change
Sensex 35,876.2 35,867.4 0.0
Source: BSE; Compiled by BS Research Bureau

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel