Will the Indo-Pak relation affect the stock markets?
The Indian economy is vehemently dependent on the stock market, and a shift due to any geopolitical tension will definitely affect the area. The stockbrokers exhibit an inquisitive urge to know if the India-Pakistan tensions will affect the rising share prices of Dalal Street. Bull or bear? That’s the question every stock trader is concerned about amidst the escalating tension. Here’s a discussion about what the consequences could be.
Volatility and market sentiments: Markets behave in an unpredictable manner when geopolitical escalations are on the rise. Even though the Indian economy was doing well, there might be some drops in sectors like tourism, aviation, and banking. Negative sentiments play a role, and the investors might pull out of putting their prospective money in these areas.
Defense and Infrastructure stocks: When tensions escalate, the defense-related stocks will see a rise in prices due to the anticipated government spending. The sectors that remain dependent on cross-border trade might see a volatile trend and bear losses.
Foreign Investment: The geopolitical instability may deter foreign institutional investors, leading to a weakening of the rupee and capital outflows.
Impact on currency & commodity: The heights of tension can lead to the devaluation of the rupee and also cause fluctuations in oil prices. Global supply chains may experience significant disruptions.
Economic Outlook: There is a long-term effect depending on whether the tensions remain as temporary or escalate, having a prolonged effect. The markets can stabilize quickly after having an initial shock.
How did the Indo-Pak tensions affect the stock market in the past?
There have been cases where the Indian stock market has been affected by escalating geopolitical tensions. That has affected the market for now, but in the long run, there were not many harsh effects. Let’s examine the historical impact on the market.
After the Kargil war in 1999, the BSE Sensex fell due to uncertainty and escalation phobia. After the war stopped, the market rebounded, and investor confidence was regained.
In 2001, an attack on the Indian Parliament led to a standoff. The market saw a short-term decline but stabilized after a few weeks, following the diplomatic interventions.
After the 2008 Mumbai terror attack, the Sensex dropped by 600 points. There was a short-lived impact, since a global meltdown occurred and a financial crisis reigned.
In 2016 the Uri attack occurred, and there was retaliation from India in terms of surgical strikes. The market declined by 1.5%-2% the next day. The defense stocks surged slightly higher as soon as the conflict started to fade away.
The Pulwama attack happened in 2019, killing 40 Indian soldiers, and an airstrike in Balakot. The stock market became volatile, fearing a war. The situation improved, and the investor confidence rebounded.
Presently, there is an escalating tension between India and Pakistan, and the stock market has shown slight fluctuations. The BSE Sensex closed at 80,776.75 and has shown a slight decline. The NSE Nifty 50 remains flat at 24,411.5, and the mid-cap and the small-cap indices gained 0.5% and 1.2%, respectively. The Indian rupee depreciated by 0.8% and stands at 85.59 INR to USD. The volatility index surged to 21.48, and market capitalization declined by 60 billion USD in a single session. The Foreign Portfolio Investors (FPI) continue to buy 5.3 billion in 15 sessions. This is a positive stance that indicates confidence in the Indian economy despite the geopolitical tensions.
During the period of Indo-Pak tension, market volatility increased. The Indian market showed resilience after the tension settled down. This has been the constant trend in the past.
What type of stocks are advisable to invest in during this period of political instability?
If you are in the investment sector, then you need to know what the right type of stocks to buy is. After extensive research, we suggest that you keep some tips in mind.
You can acquire shares from Defence & Aerospace stocks. The Government will likely spend more on the defense system. Bharat Electronics Limited (BEL), Hindustan Aeronautics Limited (HAL), and Bharat Dynamics Limited (BDL).
Government-backed companies will get a boost from security-related initiatives that are relevant to energy, production, and infrastructure.
Investment in energy and utilities can probably be wise since they are non-cyclical and have a stable demand irrespective of the political climate. Check the prices of NTPC, ONGC, and Power Grid.
The demand for FMCG (fast-moving consumer goods) will remain intact. There will be no difference in their demand even in times of crisis. Nestle India, ITC, and Hindustan Lever will always remain at the top.
The demand for pharmaceuticals & healthcare will remain untouched irrespective of any situation. Check Dr. Reddy’s, Sun Pharma, and Cipla prices and, if possible, make some investments.
Investing in gold is always considered a safe haven. You can always invest in Gold EFTs, sovereign gold bonds, and companies like Tanishq.
Let’s take an example of a portfolio that can keep you safe amidst the political stress.
Defensive sector: 45%
FMCG: 20%, Pharmaceutical & health: 15%, and Utilities: 10%
Strategic & Government focused: 25%
Defense & Aerospace: 15%
Public Sector Undertaking (PSU)-10%
Safe Haven Assets: 20%
Gold EFT/Sovereign Gold Bonds: 15%
Cash or Liquid Fund: 10%
The portfolio should be a mix of high-volatility sectors like real estate, banking, small-cap IT, and travel. Consider raising the allocation of equities if there is economic momentum. Rebalance on a regular basis in case you have volatility spikes. While you focus on the investment in the financial sector, check the prospects that will remain unaffected by the stressful geopolitical events. Avoiding beta stocks like travel & tourism is highly recommended. You can choose a diversified portfolio and work on managing risks. Choosing the right sector can help gain profit in the end of the geopolitical tensions. Choose wisely today to be a winner tomorrow.
Sweta Chakraborty is an Amazon author and SEO content writer. She contributes articles, blogs related to finance, stock market, cryptocurrency and real estates.