Beyond the Headlines: Investing Wisely After Operation Sindoor

What happens to the stock market during a war?

Does it go up or does it go down? Or does it remain rangebound till the uncertainty clears?

Let's hark our minds all the way back to World War I.

When this war erupted, US stocks crashed 30% at first, which led to a 4-month closure of the market. When it reopened in December 1914, the benchmark staged a great recovery, surging close to 90%.

The pattern was not very different in the second world war. From 1939 to the war's ending in 1945, the Dow Jones was up an impressive 50%.

Looks like the bulls have no fear of wars. On the contrary, they seem to love them.

Let's travel all the way to India and see how the markets fared during the last major Indo-Pak conflict i.e. the Kargil war.

A leading financial daily points out that the conflict lasted for a little over 2 months and during the war, Nifty delivered an impressive 37% returns and once the war was over, the 12-month return came in at a strong 29%. Yet another evidence of the bull taking a liking to the war.

Of course, it can be argued that all these examples are from countries where the war did not cause a huge damage to the physical infrastructure and ultimately, to the economy.

After all, the physical infrastructure in the US took a relatively lower hit during the two world wars. Likewise, the Kargil conflict was also restricted to a small geographical area.

Therefore, if one wants to really understand the impact of a full-blown war on the country's stock market, we should check out countries like Germany, France, England etc, where a lot of physical infrastructure was destroyed.

Well, even here, it is the bulls that ended up having the upper hand.

For perspective, both the UK as well as the French stock market ended the second World War at a higher level than when it started.

Of course, since Germany was reduced to rubble, its stock market totally collapsed and could not stage a fast recovery. But apart from Germany, stock markets of the major countries did recover and infact, gained during the war period.

Now, this does not mean that there is a 100% correlation between a war and the rise of the stock market.

There have been instances where armed conflicts have either led to a stock market fall of a prolonged duration or to a rangebound pattern. Hence, it is not a guarantee that a war necessarily leads to a stock market rise.

Thus, the context matters and also the possibility of a large-scale disruption in economic activity.

If the reaction of the Indian stock market to Operation Sindoor is anything to go by, the mood has been mixed.

When the news came out that Indian forces have targeted terrorist camps deep inside Pakistan, it was business as usual for the stock market as it was expected that matters won't escalate too much. In fact, the benchmark indices ended in the positive.

However, as Pakistan chose to climb up the escalation ladder and in turn received a befitting response from India, the mood turned jittery.

Now, I'm not geopolitical expert and hence, can offer very little by way of conflict related insights.

But I have certainly analysed the stock market in some detail and can offer perspective which I hope can turn out to be useful in the current environment.

Well, I recommend two major moves when it comes to safeguarding one's portfolio in the present background.

First, investors need to have a clear understanding of the difference between an investment worthy and a speculative stock in their portfolio. One needs to get out of speculative counters and get into investment worthy stocks.

These are stocks that have a long track record, strong balance sheets and reasonable valuations. Stocks not meeting all three criteria are speculative in my view and should be stayed away from.

Next, an investor should have at least 25% of his portfolio parked in fixed deposits or bonds. This will not only protect him from an upcoming crash if any but also make money available to buy the fallen stocks at attractive valuations.

Of course, he can increase the cash limit to even 50% if he wants but an allocation below 25% should be avoided.

You see, the whole idea behind this strategy is to ensure survival first in the event of a big crash and only then to think about upside.

Of course, those thinking only about the upside can choose to remain 100% in stocks, but they can lose big if the markets take a big tumble.

Likewise, those who are absolutely certain about a stock market crash have the option of getting 100% into cash, only to return later when the markets bottom out.

However, this is easier said than done. First, there is no guarantee that the market will crash and even if it does, pinpointing the exact bottom is more matter of luck than skill.

This is why I prefer the middle route of having a minimum allocation of at least 25% in both stocks as well as bonds.

This way, I am not only ensuring survival of the portfolio in the event of crash but I am also making sure that I don't lose out on any potential upside if conflict does not escalate, and the markets start going up.

I can't think of a better way of investing in the current uncertain times.

Happy Investing.

Warm regards,


Rahul Shah
Editor and Research Analyst, Profit Hunter
Equitymaster Research Private Limited (formerly Equitymaster Agora Research Private Limited) (Research Analyst)