L&T rose 32x since Kargil war: Why stocks ride over conflict-induced volatility

Larsen & Toubro

Indian market witnessed a knee-jerk reaction on Tuesday when news surfaced that Indian Air Force carried out pre-dawn air strikes on terror camps across the Line of Control (LoC) at Balakot, 12 days after Pulwama terrorist attack in Kashmir.

The benchmark indices ended the day off intraday lows which suggests that most of the negatives have been factored in. Even anecdotal evidence suggests that markets have always taken these events in their stride and investors have not lost money. On the contrary, there have times when investors ended up making money during such crises.

Another big positive which will act as a tailwind for Indian market is the fact that the air strike removes political uncertainty to a certain extent and brightens chances of Modi 2.0.

While the initial response of the financial market has been negative, experts believe that such attacks are unlikely to have any material impact on the markets and investors should use dips to enter markets or buy into select quality stocks.

“It could have a sentimental impact on the market, but in economic terms, the real impact should be quite contained. The denial by Pakistan establishment points to the fact that the military escalation may be limited,” Vinay Khattar, Head, Edelweiss Investment Research told Moneycontrol.

History suggests that not all terrorist attacks or military actions lead to losses in the equity market. Last two decade’s data suggests many-a-times, the market is unaffected by the news of terrorist attacks or military actions, at least in the short term.

During the Kargil conflict in 1999, the benchmark indices — Sensex and Nifty — gained 33 percent each. During the 3-month conflict, the Sensex rallied 1,115 points and Nifty surged 319 points.

Similarly, even during the attacks in Mumbai in 2008, the market reaction was surprising. Sensex surged about 400 points in two-day trade during the attack. The Nifty rallied 100 points even as Mumbai was burning.

“The initial response of the financial market has been negative, we believe such attacks are unlikely to have any material impact on the markets. For example, the Kargil war was fought between India and Pakistan during May to July 1999 period,” Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI said in a report.

“During the aforesaid period, the leading indices of Indian stock markets showed an initial decline but strong recovery thereafter. The Sensex and Nifty declined 286 points and 79 points in initial 3 trading days, but recovered strongly thereafter and ended higher by 652 points and 191 points when the conflict ended. The overall impact of the Kargil war thus was actually market positive. The economy grew at the same pace in 1999-2000 as the year before – a healthy 6.5%,” he said.

But post the first surgical strike, which was a reply to the Uri attack, Indian financial markets were down with the Sensex falling more than 100 points and the INR appreciating.

Ghosh further added that from a longer perspective, Indian financial markets, including the stock, currency and even the bond market showed traction. For example, stock markets jumped by 3,456 points, while the INR appreciated by 2.4 percent.

Wealth creation opportunity?

The impact of air force strike was absorbed by market with ease as indices closed well above their opening levels which is a positive sign. There is a big support for Nifty around 10,650-10,700 levels.

But, how can investors leverage this opportunity? Well, time and again markets give us entry points but the real test is when market swings in either direction. Patience is the tool in wealth creation.

“If we analyze similar situations in the recent past, after Pathankot, market cracked around 1,400 points, Sensex showed a dip of around 70 points after Uri. Even after surgical strike market slipped to around 500 points,” Shivendra Foujdar, Founder and Managing Partner, Avighna Trades told Moneycontrol.

“It was 1999 close to 20 years back when Kargil happened so there are many things which comes in to account if we are calculating wealth creation through stock for said investment period. Still for statistic purpose, if one had invested Rs 1 lakh in L&T around Kargil period, the current valuation would have become Rs 32,70,000 today,” he said.

“I would say the market is an opportunity every day, every situation but there is certain discipline one needs to follow,” added Foujdar.

Debabrata Bhattacharjee, Head of Research, CapitalAim says the market has always corrected in these type of situations. Whether we have Surgical Strikes or a war-like situation.

“These incidents do short-term damage to the index. In the Past, during Kargil War, Indices corrected from higher levels till the war continued. Investors who took part in that correction makes a huge return from their portfolio if they invested in quality or value stocks,” he said.

Disclaimer: The views and investment tips expressed by investment experts on bigprofitbuzz.com are his own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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