Moneycontrol
Aug 13, 2017 04:01 PM IST | Source: Moneycontrol.com

Markets are falling on war talk; but here's why investors need not worry

One common theme that runs across all markets and one that is causing anxiety in the markets is the war mongering between North Korea and the USA

Markets are falling on war talk; but here's why investors need not worry

Shishir Asthana

Moneycontrol Research

Various reasons have been attributed to the sharp fall witnessed during the week, starting from poor results, India China border stand-off, global weakness, rupee hardening and withdrawal of money by the foreign investor. Irrespective of the reason, markets have fallen by nearly 4.8 percent from its peak in a span of a week. The carnage was greater in the smaller companies with the small cap index falling by nearly 7 percent and mid cap index by 6 percent.

It is not that Indian markets are the only ones in pain. The global market has seen a recent bout of selling. The MSCI All Country Index has fallen by nearly 9.81 percent in the last three days.

Global markets have their own set of worries. One common theme that runs across all markets and one that is causing anxiety in the markets is the war mongering between North Korea and the USA.

Markets generally get anxious over every time there are war clouds on the horizon. But this time around it's different. Western media claims that North Korea has a nuclear, chemical and biological weapon, and any war would be catastrophic. Without getting into the authenticity of the claims, the very fact that there could be a threat is enough to scare the markets.

Going back in history wars have not been bad for the markets. Within months after the commencement of the war, markets had crossed the peak before the war.

A study conducted by Ned Davis Research of the most momentous geopolitical crises between 1900-2014 markets showed that markets recovered their post crisis lows in a short time and by six months they were actually trading higher than pre-crisis levels. A total of 51 events were considered including the two World Wars, the assassination of John F Kennedy, Asian currency crisis, and the Brexit votes. In almost all cases market recovered in less than a month.

Indian markets had their first scare during the Kargil war. In less than two months a new high was touched and the market posted a 35 percent gain by the end of the year.

A slowing economy was propped up as a country at war needed men and machine. Government spending was unrestricted which further fuelled the economy. As most of the top companies in the engineering sector supported the war efforts, they and the ancillary units lead the rally in the markets.

However, since the turn of the century, there has been a change in the market. While in earlier years engineering, infrastructure, and automobile industries constituted a major portion of the index, which helped in synchronizing the government with the market rally, the index composition has now changed.

Services sector now account for a major portion of the indices, a reflection of the economy. Though certain sectors of the economy will gain in case of a war, the impact on the index is uncertain. Side counters, however, will gain on increased demand.

It is in nobody’s interest that a war is declared, but historically wars, especially the shorter versions of it, have been good for the market. Any panic can thus throw up the opportunity many investors were waiting for.
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