Markets after the end of conflicts!

Markets went through a roller coaster of sentiments during the last 45 days starting with tariff wars and then Indo-Pak conflict, while the markets were already reeling under global uncertainty due to tariff wars, terrorist attacks and thereafter a retaliation created volatility in the market. NIFTY touched a low of 21,744 on tariff announcements and high volatility was seen during the period of conflict. India has retaliated and provided a strong message to terrorists and their supporters. Geopolitical tensions, particularly between nuclear-armed neighbors like India and Pakistan, have sent ripples through global financial markets. The probability of an Indo-Pak nuclear war, even if hypothetical, raises questions about how markets react when such high-stakes conflicts resolved. History indicates that markets tend to recover quickly once there is greater clarity.

As Howard Marks aptly notes in The Most Important Thing, “The biggest investing errors come not from factors that are informational or analytical, but from those that are psychological.” 

This article examines the historical behavior of markets following high-risk geopolitical events, with an objective of deriving insights for managing market dynamics in post-conflict situations.

Our thesis is both straightforward and complex: markets, influenced by human psychology and economic fundamentals, typically overreact to geopolitical risks in the short term but recover swiftly once uncertainty diminishes, provided that structural economic damage is minimal. We analyze past Indo-Pak conflicts and similar events, using data and insights, to help investors prepare for these scenarios.

The Indo-Pak Context: A History of Tension and Resolution

India and Pakistan have fought four major wars (1947, 1965, 1971, and 1999) and numerous clashes, with each conflict influencing regional and global markets to varying degrees. These events, while localized, carry global implications due to the countries’ strategic importance, nuclear capabilities, and economic ties. To understand market behavior post-conflict, we’ll focus on the 1965 and 1971 wars, as well as the 1999 Kargil conflict, drawing parallels with other geopolitical crises like the Gulf War (1991) and the U.S.-China trade war escalation (2018–2019).

The 1965 Indo-Pak War: A Quick Recovery : The 1965 war, lasting roughly a month, was a high-intensity conflict over Kashmir. While global markets were less integrated then, India’s nascent stock market, represented by the Bombay Stock Exchange (BSE), experienced volatility. Data from historical BSE records shows a 12% dip in the Sensex’s predecessor index during the conflict’s peak in September 1965. However, post-ceasefire, the index recovered within three months, gaining 15% by December 1965, driven by restored investor confidence and government assurances of economic stability.

Why the swift rebound? As Ray Dalio explains, markets price in “worst-case scenarios” during uncertainty, but once the fog clears, fundamentals reassert themselves. India’s economy, primarily agrarian at the time, was less exposed to global capital flows, limiting systemic damage. The lesson here is that localized conflicts, absent structural economic disruption, tend to have short-lived market impacts.

The 1971 Indo-Pak War: A Tale of Divergent Outcomes: The 1971 war, culminating in Bangladesh’s independence, was longer and more economically consequential. India’s GDP growth slowed to 1.6% in 1971–72, reflecting war-related disruptions. The BSE index fell 18% during the conflict but rebounded 22% within six months post-war, buoyed by India’s decisive victory and international support. Pakistan’s markets, less developed and harder to quantify, faced prolonged stagnation due to the loss of East Pakistan, a significant economic region.

This divergence underscores a key principle: markets favor stability and clarity. India’s victory restored investor confidence, while Pakistan’s economic fragmentation delayed recovery. As Nassim Taleb notes in Antifragile, “systems that adapt to shocks thrive, while fragile ones falter.” Investors should note that post-conflict market performance often hinges on the victor’s ability to project stability.

The 1999 Kargil Conflict: A Modern Market Response: The Kargil conflict, a limited but intense clash, occurred in a more globalized era. The BSE Sensex dropped 10% during May–July 1999 but surged 25% by year-end, fueled by India’s military success and a tech-driven global rally. Foreign institutional investors (FIIs), initially cautious, poured $1.2 billion into Indian equities in Q4 1999, signaling confidence in India’s stability.

This pattern aligns with Morgan Housel’s observation in The Psychology of Money: “Most financial mistakes are rooted in assuming the future will look like the recent past.” Investors who panicked during Kargil missed the subsequent rally, a reminder to focus on long-term fundamentals over short-term noise.

Comparable Geopolitical Events: Broader Lessons To broaden our perspective, let’s examine two non-Indo-Pak geopolitical events that mirror the dynamics of instability.

The 1991 Gulf War: Oil Shocks and Market Resilience : The Gulf War, following Iraq’s invasion of Kuwait, sent oil prices soaring 70% in 1990, from $20 to $34 per barrel. Global equities, including the S&P 500, fell 15% in Q3 1990. However, after the U.S.-led coalition’s victory in February 1991, oil prices stabilized, and the S&P 500 gained 19% by mid-1991. Emerging markets, including India, were less affected due to limited integration, but the BSE index still rose 12% post-conflict, reflecting global optimism.

This case highlights a critical insight: geopolitical shocks tied to commodities (e.g., oil) can amplify market reactions, but resolution often triggers sharp recoveries. As BlackRock’s Russ Koesterich notes, “Markets hate uncertainty, but they love resolution.”

U.S.-China Trade War (2018–2019): A Modern Parallel: The U.S.-China trade war’s escalation in 2018–2019, marked by tariffs and retaliatory measures, created global market jitters. The MSCI Emerging Markets Index fell 14% in 2018, with India’s Sensex dropping 8% amid fears of disrupted trade flows. The Phase One trade deal in January 2020 sparked a 10% rally in the Sensex within three months, as clarity on trade terms restored investor confidence.

This example illustrates how modern markets, connected through trade and capital flows, react to geopolitical resolutions. As Goldman Sachs noted in a 2019 report, “Trade war resolutions reduce tail risks, allowing markets to refocus on growth.”

Table: Market Performance Post-Geopolitical Events

Event	Market/ Index	% fall event	%Gain post	Time to Recovery	Key Driver
1965 Indo-Pak War	BSE Index	-12%	+15%	3 months	Ceasefire, restored confidence
1971 Indo-Pak War	BSE Index	-18%	+22%	6 months	India’s victory, global support
1999 Kargil Conflict	BSE Sensex	-10%	+25%	5 months	Military success, global rally
1991 Gulf War	S&P 500	-15%	+19%	4 months	Oil price stabilization
2018 US China Trade War	MSCI EM	-14%	+10%	3 months	Phase One trade deal

Sources: BSE historical data, S&P 500 records, MSCI reports, Goldman Sachs insights

Frameworks for Investors - Post-Conflict on Markets

Behavioral Finance: The Overreaction Trap: Behavioral finance teaches us that markets overreact to fear-driven events. During conflicts, investors often sell off assets, fearing escalation, only to miss the rebound when tensions ease. Daniel Kahneman’s Thinking, Fast and Slow highlights how humans overweight recent risks, leading to irrational sell-offs. For Investors, the lesson is to avoid knee-jerk reactions and maintain diversified portfolios to weather volatility.

Connecting the Dots: Psychology Meets Economics: Geopolitical resolutions are like clearing a storm: the skies don’t just brighten; they often reveal new opportunities. Consider an analogy from physics—markets behave like a spring under tension. Conflict compresses the spring, but resolution releases it, often with greater force. This dynamic explains why the Sensex surged 25% post-Kargil, outpacing its pre-conflict level. Investors who understand this interplay of psychology (fear of loss) and economics (fundamental resilience) can position themselves to capitalize on recoveries.

Practical Implications for Investors: Stick to you financial plan and avoid any knee-jerk reaction, plan for near term cash-flows appropriately and keep opportunistic cash to seize opportunities during post-conflict rallies Have a balanced portfolio during such period and diversify to alternate assets like AIF, MLD, unlisted opportunities , startup or Pre-IPO opportunities which may provide stability to portfolio while providing long term growth. Use tools like the VIX India to gauge fear levels. Sharp spikes often signal buying opportunities, as Peter Lynch famously said, “Buy when others are fearful.”

Conclusion: The Resilience of Markets and a march to AMRITKAAL

Markets, like humans, are emotional in the short term but rational over time. Historical Indo-Pak conflicts and similar geopolitical events demonstrate that while instability triggers volatility, resolution sparks recovery. For investor, the key is to avoid emotional traps, diversify strategically, and focus on fundamentals. As Warren Buffett advises, “Be fearful when others are greedy, and greedy when others are fearful.” By understanding the patterns of post-conflict market behavior, investors can turn uncertainty into opportunity, ensuring their portfolios not only survive but thrive. Post end of conflict – Indo pak war as well as US china tariff negotiation, India is in an attractive position. Post covid India has demonstrated to convert every threat into an opportunity – Mass health pandemic into a healthcare giant, Russian oil as an opportunity and now our retaliation as a military powerhouse. This is another moment of anti-fragility and an opportunity to thrive in AMRITKAAL!