Factors affecting Indian markets and economy Part II: Surgical strikes and wars

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Whether it is the Kargil conflict of 1999, Indian parliament attack in 2001, or the recent surgical strikes on Pakistan in 2016 and on Myanmar in 2017, these events stand to be very crucial for India, not only for the geopolitical purpose but also because they possess the power to affect India’s economy and its financial markets. Even if we take into account the global viewpoint, the World Wars or the recent tussle between the U.S and North Korea has had an influence in changing the sentiments of the global markets.  

Geopolitics and Indian trading sentiments

Looking at history, we can say that the Indian market has the tendency to react negatively to wars and surgical strikes, which leads to a sudden knee-jerk reaction for the stock market, but it has also been noted that after the geopolitical tensions are over, demand tends to make a drastic comeback.

Recalling the Kargil war, when it occurred between May and July in 1999, it led to a slump of 286 points and 79 points in Sensex and Nifty respectively. On 27th May, India launched air strikes on Pakistan, and the news led to a reduction in market, with the Sensex falling 2.8 percent in a single day. But as they say, the Sun always signs brighter after the rain. After India declared its victory over Pakistan, the market recovered and ended higher by 652 points and 191 points respectively. Also, during the three months period, Sensex and Nifty 50 indices surged by around 35 percent. It also worked positively for the Indian economy as, during the year 1999-2000, the economy grew at a good pace of 6.5 percent.

During the surgical strike that India conducted against Pakistan in September 2016, the benchmark Sensex fell by two percent at around 500 points, and the Nifty also ended about 1.76 percent lower. That also led to a lower valuation of the Indian rupee, which closed 37 paise lower at 66.85 against the dollar at that time. NSE’s Volatility Index or VIX, a measure of near-term market volatility, jumped 33.2 percent, the most since August 2015, to close at 33.23.

A year after that, Indian army’s strike on Indo-Myanmar border again contributed in the downturn of the market, with the Sensex falling by 440 points or 1.39 percent and Nifty by 136 points or 1.38 percent in the second half of that day. The market recovered after that as a result of the Indian Government clearing its position on the field.

One can arrive at the conclusion that the Indian market does not support strikes and wars as it creates higher volatility and uncertainty in the market and investors do not like that.

The sentimental play

Behind the negative sentiments of people, there are major objectives that play a vital role. The most important part here is the trust and mindset of foreign investors. With rising probability of war, they find it very risky to invest in the market and thus start withdrawing their funds from the market, which often led to sudden drops. The same principle applies to the domestic retail investors, the mindset of booking profit (in many cases saving money) picks up the pitch, and they end up doing panic selloff, and the market drops down.

The other notable point here is that we cannot predict a war. A surgical strike can convert into war anytime, and that contributes to a panic wave in investors, affecting the national economy.

Every country, in their budgetary allocation, gives a share to the defence sector, for regular utilisation and developing and maintaining armed forces and equipment. In normal times, the allocation made is sufficient, but in wartime, the defence expenditure soars. That leads the Government to transfer the funds of other sectors to the defence sector, which cuts the scope for further investment in sectoral development activities like manufacturing, construction, etc. In short, the money to create assets gets diverted to defence, and that creates a slump in the market. In wartime, as the Government raises its expenditure and cuts the rates, inflation goes up which degrades the value of the currency.

Apart from these, another thing that played a role at the time of the surgical strike was the upcoming monetary policy meeting which was due for four days after. Along with that, the market wasn’t corrected from its Brexit’s slump, and the strike gave the investors a reason to sell off and capitalise their investment.

The global sentiments

Talking about wars at the global level, the World Wars come first in our mind. World War I started in 1914 and created havoc in the European stock market. As a result, it shut down amidst fears of losing capital and liquidity. In a total opposition, the U.S has always held a different stance on the wars. In WWII, when Germany invaded Poland, people expected the U.S to stay unaffected, but when France got invaded by Hitler, the market fell by 23 percent in just eight days. Further, the Japanese attack on Pearl Harbor on 2nd December 1941 led to another slump of the market with the Dow falling six percent in two days and hit 92.69, but people were waiting for some positive news in the country. As soon as the U.S got a stronger position in the war and involved in it full-fledged, the market started responding for the better. Soon, on 7th May 1942, the Dow increased by 1.06 percent and the Federal rate cut to zero percent to help the market recover. The best was yet to come, as, in the next four years, the Dow witnessed a hike of 130 percent.

The overall takeaway

We can conclude that war or the surgical strike tensions between countries create the fear of uncertainty and higher volatility of the market and the economy, which is negative for investment and development purposes. From the economic viewpoint, it drains the revenue of a nation and kills innocent people, as per a say; a war can take a country live ten years back as compared to the other countries. The inflation rate and GDP can still manage to increase during this time as the government tries to cope up with the expenses, but it is to be noted that war can never create wealth!

P.S- The article was originally published in The Qrius (Formally the Indian Economist)

Devanshee Dave

[email protected]

 

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