How Will Markets React To The Current Conflict Induced Volatility?

The Indian stock market's reaction to the ongoing conflict between India and Pakistan has been sudden and reactionary. On Tuesday, following the Indian Air Force's attacks at Balakot the benchmark indices did slump but recovered later in the day.

On Wednesday, the escalating Indo-Pak tension dragged the Sensex down by 189.54 points or 0.53 percent to 35784.17 points while Nifty declined 68.10 points or 0.63 percent at 10767.20. About 1,110 shares have advanced and 1,034 shares declined while 122 shares remained unchanged. however, Nifty Midcap and Smallcap indices surged.

In Pakistan, markets have extended their losses, with KSE100 index of Karachi Stock Exchange down over 1,400 points or 3.7 percent.

However, history points out that not always do markets reacted negatively to a terrorist attack or war situations prevailing in the country. In fact, during the Kargil war in 1999, both the stock market indices, that is Sensex and Nifty 50 gained 33 percent each during the three months of conflict.

Terrorist attacks in Mumbai in 2008 had the Sensex rising 400 points in the two-day period.

Markets tend to get volatile at fragile situations like these. The reactions will be mixed but short term as the fundamentals will come back to play.

Analysts do not suspect a full-fledged war to occur between the two countries and no major economic effect to take place. However, if the conflict continues, it could lead to a further correction in some stocks.

Experts say that it is unlikely that there will any material impact on the financial markets and investors can instead look at this as an opportunity to buy quality stocks that have dipped.

While this might be seen as a chance for wealth creation, there is no saying when the market will go the other way. As always, wealth generation requires patience and good judgment on the investor's part.