Head of Global Quantitative Equity explains how ongoing tensions could play out in Indian equity markets
The recent resurgence in hostilities between India and Pakistan over the disputed region of Kashmir has, so far, produced somewhat muted market reactions. This incident, which began following a terrorist attack against Indian tourists near the town of Phalagam in April, has escalated to cross-border shelling, skirmishes, air and missile strikes, and the appearance of drones over major Indian and Pakistani cities. Arup Datta’s hope, first and foremost, is for a peaceful resolution to this conflict and a quick settlement.
Datta is the Head of Global Quantitative Equity at Mackenzie Investments. He spoke to WP about some of the market reaction we have seen so far in Indian equities. He put that movement in the context of recent global economic shifts as well as overall emerging market performance. While he sees the emerging tensions as a risk to both stock market performance and regional peace, he notes that as of now there may not be cause for significant alarm among emerging market investors.
“Obviously a prolonged conflict between Indian and Pakistan can’t help the market, but we don’t know if it’s coming to war at this point, so we’ll have to see how it plays out,” Datta says. “In the first few days the Indian stock market reaction was very muted, close to flat. But markets have come in a bit since, between one and two per cent, which is not surprising to me… I hope this is contained, and if it is then this will just be a blip for the Indian stock market. If it’s not, then we will see a bit more of a drawdown.”
While India had been treated as an emerging market darling for years up to this point, Datta notes that Indian equities had already fallen between 15 and 20 per cent between autumn and spring of this year. While the prospect of a quicker resolution to US trade issues had spurred some stronger performance in April, this conflict is not exactly impacting a market that was “priced to perfection.”
Despite some trepidation and sadness around the conflict, Datta says he remains “sanguine” on Indian equities within his own framework as a stock-picking quantitative portfolio manager. His current position is slightly underweight India against the benchmark, but Datta notes that this is not as a result of the recent emergence of conflict with Pakistan.
While the conflict in Kashmir is decades-old and has long overhung India’s geopolitics, Datta notes that each of the four main emerging markets has a form of conflict risk associated with it. India, China, Taiwan, and South Korea each have their own disputes with a neighbour. China and Taiwan, notably, face a degree of tension with one another that Datta notes could have a much larger global market impact than the current tensions between India and Pakistan.
Conflict between India and Pakistan comes, however, with an additional tail risk as both countries are nuclear-armed. Datta notes that this risk is “always worrisome” but highlights the counterpoint that the risk of nuclear war could act as a deterrent against escalation and keep this conflict relatively contained.
While the ongoing conflict may overhang Indian equity markets somewhat, Datta also highlights one other shift that could potentially change investor sentiment: a possible trade deal with the US. Datta says that the prospects of a relatively quick deal between the US and India appear positive. Such an announcement may be supportive for the Indian economy.
As with any emerging conflict in the modern era, information is key but truth is hard to come by. Datta notes that there have been shades of propaganda laid over news and statements emerging from both the Indian and Pakistani sides of the conflict. In seeking more objective information Datta has leveraged his own personal and professional contacts in the region, seeking people he knows will offer more balanced viewpoints less clouded by a particular political narrative.
As advisors look for their own sources of information and talk to clients about the risks in emerging markets, Datta urges a wider view of events and a degree of patience as greater clarity emerges.
“I would take a longer-term view. Don’t look at things day to day,” Datta says. “In the long-run this will go away. I’m not too worried, I would not make a move based on this, but having said that if there are more skirmishes the market may go down a bit more. These may be hard times, but I would sit tight.”
