The geopolitical cloud cast by Operation Sindoor may not darken India’s market outlook, if history and current fundamentals are any guide, according to Nilesh Shah, Managing Director at Kotak Mahindra Asset Management. Drawing parallels with the Kargil conflict of 1999, Shah points out that the market’s eventual rally during that episode could well repeat, provided the current standoff remains a limited engagement. Positive earnings picture, fund flows and favourable trade related news also keep investor sentiment positive, Shah said.
History of wars
According to data compiled by Kotak Mahindra Asset Management, past military operations and conflicts — from the Kargil War in 1999 to the Balakot airstrike in 2019 — have had only short-term impact on the Indian equity markets. For instance, during the Kargil conflict, the Nifty 50 fell 8.3% in the month preceding the war but surged 36.6% during the conflict and gained 29.4% over the next year.
More recent surgical strikes, like Uri (2016) and Balakot (2019), triggered mild volatility, but markets quickly regained footing. One year post-strike, Nifty 50 posted double-digit gains in both instances.
While macroeconomic stress points such as inflation and fiscal deficit tend to rise during prolonged conflicts, the report notes that GDP growth often remains resilient, supported by domestic consumption and investment momentum.
“Back during Kargil war too, from the time India discovered intrusions in Kargil, the Nifty fell around 15%. But as clarity emerged around a limited conflict, the market reversed sharply,” Shah recalled. “This time, too, if the situation stays contained, investors will likely refocus on flows, earnings, and improving global trade dynamics.”
Supporting fundamentals
The flow story is turning supportive. After several months of selling from both active and passive foreign investors since September, April saw a turnaround. Passive flows resumed, with a single-day inflow of Rs 11,000 crore, and May has seen buying from both camps. Domestic institutional demand remains steady, and the supply side remains benign in the absence of large IPOs or OFS activity, Shah said.
On fundamentals, the picture is improving. While the September-December quarter disappointed, Q4FY24 earnings from the top 100 companies—which contribute 60% of market profits — have come in better than expected. Shah estimates Nifty Q4 FY24 EPS at Rs 275, with FY25 earnings also expected to stay on track.
Adding fuel to sentiment are fresh positives on the trade front. The newly inked UK trade deal, praised by Shah as a "fantastic agreement" covering textiles, autos, and alcohol, signals progress on the global stage. "If this becomes the harbinger of more deals—especially with the EU—it could accelerate the China Plus One growth story for India," he says. Chemicals, where India already has cost advantages, stand to benefit as China becomes less competitive post-tariffs.
Shah likens India’s trade opportunity to a "penalty kick" handed by the Commerce Ministry. “We’ve missed such chances before, but hopefully not this time,” he says, pointing to the high-level attention India is receiving—22 EU member nations recently sent delegates to New Delhi.
With fundamentals, flows, and structural reforms aligning, Shah believes most indicators remain pro-market. “The only variable is whether this remains a conflict or escalates into a war. If it's limited, history shows markets will look through the noise and keep marching ahead.”
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