Market efficiency refers to the extent to which price of the asset reflects all available information. Recently, India conducted a surgical strike against Pakistan and that news got smashed everywhere. And so, does the stock market. Both the benchmarks NSE Nifty and BSE Sensex ended the day lower by over 1%.It created the initial bout of apprehension. But the question arises; do such attacks really have a negative impact on market?
Let’s consider the example of Kargil War. The Kargil war was fought between India and Pakistan in Kargil, during May to July 1999. During the aforesaid period, the leading indices of Indian stock markets show an initial decline but recovery thereafter.
Market Indicators During Kargil WarIndicators26-May-9926-Jul-99ChangeSensex39734625652Nifty1136132619110-yr Gsecs (%)11.7611.74-0.02Rs/USD42.843.31.2Source: SBI RESEARCH
The Sensex and Nifty has declined by 286 points and 79 points in three trading initial days respectively, but recovered thereafter and ended higher by 652 points and 191 points when the conflict ended. The overall impact of the Kargil war was actually positive.
The experience of Kargil invasion shows that the equity markets react negatively in the first phase of such crisis but a decisive and de-escalatory response then removes the initial nervousness and allows the market to bounce back. So, can we conclude that it is the nature of the market to react instinctively and be apprehensive in the beginning and later on take stock of the situation with a cool mind?
Sticking to the thought that “History repeats itself”, the overall effect or the net impact on will be zero. Also, there are other logical reasons for believing that the situation is unlikely to lead to full-fledged hostilities. That’s because Pakistan’s army is denying that any raid took place at all—they claim it’s an “illusion”. If so, the question of retaliation does not arise. And the Indian side has said that for their part, the strikes are over. That seems to suggest that any action will be limited to cross-border shelling, which the markets will take in their stride.
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