Resilience or complacency? Why terror isn’t moving the market

Resilience or complacency? Why terror isn’t moving the market

By any measure, the car explosion yesterday near Delhi's Red Fort was nothing to be shrugged off. Yet, if you look at the ticker this morning, investor mood seems almost indifferent. A move of less than half a percent is random — it can occur any day, any time, without any reason.

The terror attack and the heightened Indo-Pak tensions under Operation Sindoor barely registered as a blip on Dalal Street. The market went up 0.6% the day after the Pahalgam attack (April 22, 2024) and oscillated around 1% till the ceasefire on May 10, 2024.

That calm isn’t callousness; it’s conditioning.

Markets remember — and they learn

This isn’t the first time India’s markets have faced the sound of gunfire. During previous conflicts — from Kargil to Balakot — the Nifty’s average drawdown has been less than 5 percent, and markets have, in fact, sprung up on ceasefire, often without any drawdown at all.

What explains the missing panic?

Well, this isn’t bravado; it’s muscle memory. The market has internalised that wars and attacks shake sentiment, not fundamentals — at least, not for long. And this isn’t unique to India; it’s been proven across the world, from the Arab Spring to the Russia–Ukraine war.

Just in case we forget, Warren Buffett has also famously reminded the world often enough that if there’s a major war, you won’t care what your stocks are doing, because you’ll have much bigger things to worry about!

Earnings trump everything

Gyaan-baaji aside, focusing on the more important factors at hand with respect to our markets — the numbers are talking louder. The ongoing earnings season has come in better than expected. According to Motilal Oswal, upgrades have outnumbered downgrades this quarter, with their coverage universe showing a healthy 14 percent year-on-year profit growth.

So far, 27 Nifty companies have announced their earnings for the September quarter, reporting year-on-year growth of 9 percent in sales (7 percent estimated), 8 percent in EBITDA (8 percent), 5 percent in PBT (5 percent), and 5 percent in PAT (6 percent). Within the Motilal Oswal universe, 151 companies have reported results for the September quarter, posting year-on-year growth of 8 percent in sales, 13 percent in EBITDA, 13 percent in profit before tax (PBT), and 14 percent in profit after tax (PAT). These results surpassed estimates of 5 percent, 8 percent, 7 percent, and 9 percent, respectively.

The commentaries from other analysts aren’t wildly different. Overall, most believe earnings cuts have moderated and the cycle appears to be bottoming out, with double-digit growth expected in the year ahead.

So over the past year, while markets have delivered muted returns, fundamentals have improved — and so have valuations. This gives the market a fundamental anchor, a reason to look past the headlines, especially when these risks are unknown and unquantifiable.

Liquidity cushions fear

The other big reason for the market’s composure is the seemingly inexhaustible liquidity. Domestic mutual funds continue to see strong inflows. This trend seems irreversible for now, as mutual funds have become the savings vehicle of choice for Indian households — meaning inflows into equities through mutual funds are no longer derailed by market gyrations.

When money keeps coming in, fear has a shorter shelf life.

What is also keeping fear under check is FPI action. The big selling that dented markets last year has lessened, and FPIs are now buying selectively. India’s valuation premium against emerging markets is now aligned with its long-term averages. It’s no longer as expensive as it was over the past couple of years.

Besides, there are other sane (and some insane) arguments that favour India.

Of them, low inflation is one. A growing belief that the next RBI move could be a rate cut — thanks to benign inflation — is creating a macro backdrop that is simply too supportive to derail.

The rest of the arguments owe themselves to the wisdom of Albert Einstein — the theory of relativity. In an environment where global growth looks wobbly, India’s corporate earnings trajectory is firming up. Even more, as the AI frenzy continues and some investors turn jittery, India is now being touted as an anti-AI trade.

Even globally, the winds are favourable. The expected easing of trade friction — including progress on the Trump tariff settlement — suggests a less hostile environment for exports and capital flows. Oil prices, too, have stayed in check despite the geopolitical noise. For a market that has grown used to discounting daily global drama, the latest flare-up barely qualifies as a storm.

The psychology of a mature market

I hate to repeat this phrase that often gets parroted in our markets — that investors have matured — because they never do. Otherwise, “mature” markets like the US would never see serious corrections. But they do, right?

All one can say is that today, conditions are more supportive of markets — be it earnings growth, which is a fundamental pillar, or liquidity, which offers technical comfort. “Traders” are no longer reacting to every headline as an existential threat because there are “investors” waiting in the wings to support.

So no risk to markets now?

Markets are telling us something important: they’re done overreacting. The muted response to terror is a reflection of confidence — in macro stability, in corporate earnings, and in Indian savers’ faith in equity markets.

That doesn’t mean risk has vanished. Risk is inherent to equities. But it does mean panic has.

As for risk with equities, it’s Investment 101: watch those earnings — be it peacetime or terror time.

And as Buffett says, “The best thing you can do is to be prepared. But not prepared for war — prepared for opportunity.”

If there were to be a blow up, you should know where to run and take shelter.