Posted On Friday, Sep 30, 2016
Geo-political tensions have been predominantly looming over the Indian economy. The Indian Army yesterday carried out retaliatory surgical strikes against suspected militants across the Line of Control (LOC). This happened nearly 10 days after the Uri attack that claimed the lives of 19 jawans. While there have been several instances of cross-border firing, surgical strikes across the LOC are rare. Simmering tensions between the two countries have prompted the Indian establishment to pressurize and isolate Pakistan by using a multi-pronged approach that involves boycotting the SAARC summit, considering withdrawal of a critical water-sharing pact and, most recently, using military might.
Implications on financial markets
The financial markets, as we know, are hypersensitive to global events. The possibility of a conflict at home is reason enough for jitters to spread across market segments. On September 29, 2016, the Indian stock markets opened on a positive note. By midday, news reports of surgical strikes were confirmed by credible sources. At the end of the day, the markets nosedived by ~2 percent, with the Sensex closing at 27,827.53.
A high degree of uncertainty is involved when predicting military and diplomatic developments. However, historic incidents can perhaps help us judge their implications. In the past, we have witnessed increased tensions between India and Pakistan on two occasions - the Kargil conflict of 1999 and the attack on the Indian Parliament in 2001. The market sentiments were hit after both these incidents and volatility remained high over the short run. However, recovery was quick. S&P BSE Sensex recovered from its losses of the Parliament attack within a month; similarly during the Kargil conflict, leading indices of domestic stock markets declined initially but recovered thereafter. While we can draw some "relief" from the pattern, there is a striking difference between the markets during that time and now. Unlike then, the share of foreign investments in the Indian markets is significant now. Foreign investment may take flight in the event of escalating geo-political tensions. However, this seems unlikely as of now as the scale of the present incident appears smaller compared with other occasions mentioned before.
What should investors do?
Volatility is high amidst uncertainty. Astute investors have all along advised others to consider market volatility as a friend. This could particularly be true in case of the Indian markets. India is the fastest-growing economy in the world. Earnings of leading Indian companies are bottoming out. There could be a sharp surge in the profits of listed companies. All this augurs well for equities in the long run. Investors should see such scenarios to buy and remain invested in the equity markets. The best way to ride through the volatility and benefit from it is by starting or continuing with a systematic investment plan (SIP) in equity funds. By doing so, you can systematically spread your purchases over time. When the markets dip, you automatically buy more units, thereby reducing the average cost of your investment and increasing the potential gains over the long term.
It would also be prudent to diversify your portfolio by purchasing gold funds. Internationally, gold prices tend to surge during episodes of geo-political tensions. In our view, investors should strike out the "sell-off" fear and remain invested in equities while allocating 10-20% of their portfolio holdings towards gold funds.
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