Stock Market May Correct 5-10% If India-Pakistan Tensions Flare Up, Finds Anand Rathi Study

The NSE Nifty 50 is unlikely to correct more than 5-10% even if there is a substantial escalation in conflict between India and Pakistan, an analysis by Anand Rathi Research found.

The findings are based on the analysis of historical precedents and current global risk pricing.

The analytics firm's report 'India-Pakistan Conflict - Possible Impact on Indian Equities' also revealed that the average equity market correction across conflicts was 7%, with a median correction of 3%.

Anand Rathi Research conducted the study to understand how Indian equities, particularly the Nifty 50, responded to similar escalations in the past. This comes amid the fresh rise in tensions between India and Pakistan following the terrorist attack in Pahalgam, that claimed the lives of 26 civilians.

Following the terror attack, India announced the suspension of Indus Water Treaty with Pakistan, and has prohibited the issuance of visas to Pakistani nationals. Both the countries have also downgraded their diplomatic ties.

On Friday, the NSE Nifty 50 fell up to 1.45% to hit an intraday low of 23,847.85, while the Sensex was down up to 1.5% to 78,605.81. The market volatility gauge, VIX, rose nearly 6% in the early hours of trade.

At market close, Sensex was down 0.74% at 79,212.53, whereas the Nifty 50 settled 0.86% lower at 24,039.35.

Anand Rathi's analysis is based on historical precedents, including four major India-Pakistan confrontations since the Kargil War, as well as 19 other war or war-like events involving G20 countries over the last 25 years.

"Except during the Parliament attack in 2001, Indian equity markets did not correct more than 2% during periods of high tension with Pakistan," the study stated.

During the Parliament attack, the stock markets had crashed by 13.9% between Dec, 13, 2001 and Oct. 1, 2002.

Even then, the correction was likely driven more by global factors, particularly the about 30% decline in the S&P 500 around the same period, the research firm pointed out.

The 2016 Uri attack, which was followed by India's surgical strikes, caused the markets to fall by 2.1% between Sept. 18 and Sept. 29 that year.

Meanwhile, India's Balakot airstrike following the Pulwama terror attack caused the markets to fall by 1.8% between Feb. 14 and March 1 in 2019.

The Kargil war saw the least impact on the Indian markets, as the period between May 3 and July 26 in 1999 witnessed a correction of only 0.8%.

The other events that the study took into consideration include the Russian invasion of Ukraine that saw markets dive by 33.4% on Feb. 24, 2022, while the Saudi Arabia-led intervention in Yemen led to a fall of 20.8%.

The impact was estimated by examining past conflicts and using stock market performance from the day before they began.

For longer conflicts, the lowest point within the first six months was considered. For shorter ones, the lowest point during the conflict period was used.

The research firm, however, advised investors currently following the 65:35:20 strategy to "maintain allocation". For those with any equity gap in the portfolio, it suggested to "invest now thereby getting aligned to the strategic allocation of 65:35:20".

Notably, the strategy refers to allocating 65% of the portfolio to stocks, 35% to bonds, and 20% to other assets like gold or cash.