5-10% stock market correction ahead? What 4 major India–Pak conflicts since Kargil War suggests

A sharp rally in the stock market suggests investors are not factoring in any major escalation in the India-Pakistan tensions. But if history is to go by, the average equity market correction due to past 23 conflicts globally was 7 per cent, with the median correction standing at 3 per cent, said Anand Rathi.

The domestic brokerage took into account four major India–Pakistan confrontations since Kargil War of 1999 and 19 other war or war-like events involving G20 countries over the last 25 years. 

"The heightened uncertainty relating to Indo-Pakistan tensions will weigh on the markets. It is very difficult to judge how much the market has discounted. Going by the resilience of the market, it can be said that the market has not discounted a scenario of the tensions culminating in a war between the two countries," said VK Vijayakumar, Chief Investment Strategist, Geojit Investments.

Anand Rathi, however, noted that even in the event of a substantial escalation, the Nifty unlikely to correct more than 5–10 per cent. This assumption is based on historical precedent and the current global risk pricing, the brokerage said. 

Anand Rathi noted that except during the Parliament attack in 2001, Indian equity markets did not correct more than 2 per cent during periods of high tension with Pakistan.

"Even the correction during the Parliament attack (2001-02) was likely driven more by global factors, particularly the 30 per cent decline in the S&P 500 around the same period," it said.

The Kargil war started in  May 1999 and concluded in July 1999, with the Nifty falling a mere 0.80 per cent. In the case of attacks on Indian Parliament in December 2001, the India-Pakistan tensions dropped 13.9 per cent. The 2016 Uri attack and surgical strikes later led to a 2 per cent drop in Nifty over September 18-29, 2016. The 2019 Pulwama attack and Balakot airstrike in 2019 over Fedruary-March 2019 led to 1.8 per cent drop in the NSE barometer. 

Anand Rathi said stock investors currently following the 65:35:20 strategy should maintain their stock allocations, adding that investors who have any equity gap in the portfolio should invest now, thereby getting aligned to the strategic allocation of 65:35:20 strategy.