War and Investing: Navigating Markets in Turbulent Times

War, in its very essence, is destructive. It upends economies, displaces societies, and brings with it uncertainty. But from an investor's lens, the relationship between war and markets is more nuanced. Historically, financial markets have demonstrated a remarkable capacity to adapt — and in some cases, even thrive — during and after geopolitical conflicts. This article explores the empirical relationship between war and investing, examines sector-specific outcomes, and outlines strategic considerations for disciplined investors.

1. Initial Market Reaction: Shock, Panic, Volatility

The immediate aftermath of a war outbreak — whether global or regional — typically induces a wave of risk aversion. Investors rush toward safety, leading to sharp sell-offs in equities and a rally in defensive assets like gold, U.S. Treasuries, and the U.S. dollar.

Case in Point: During the early weeks of the Russia-Ukraine conflict (Feb–Mar 2022), global equity indices dropped by 5–10%, while gold and oil prices surged. The Indian stock market, too, saw a significant correction, especially in sectors sensitive to crude oil prices.

2. Markets Recover — Often Before Peace is Declared

While the onset of war causes market turmoil, history shows that markets often rebound well before the war ends. This is largely due to pricing-in mechanisms: markets discount the worst outcomes early and stabilize once clarity emerges.

Historical Trends:

World War II: The U.S. stock market began recovering in 1942 — three years before the war ended.

Gulf War (1990): Markets bottomed before the first airstrikes began.

Kargil War (1999): Sensex fell ~12% but recovered within 6 months post-conflict.

3. Sectoral Winners and Losers: A Divergence in Impact

Winners:

Defense & Aerospace: Benefit from increased government spending.

Energy & Oil: Supply disruptions push prices higher.

Fertilizers & Commodities: Geopolitical disruptions to global supply chains boost demand for domestic producers.

Gold & Silver: Act as safe-haven assets.

Losers:

Travel & Aviation: Hit by global risk-off sentiment and oil price shocks.

Consumer Discretionary: Consumption slows due to inflation and uncertainty.

Emerging Market Currencies: Risk of depreciation and FII outflows.

4. Macroeconomic Effects: Inflation and Interest Rate Risk

Wars are inflationary by nature. They disrupt global trade routes, reduce supply of essentials (energy, metals, grains), and increase logistical costs.

Central banks often respond with tightening monetary policy, increasing interest rates to contain inflation — which may lead to valuation compression in equity markets, especially for growth stocks.

The RBI’s monetary tightening in 2022, partially in response to inflation driven by the Russia-Ukraine war, is a clear reflection of this dynamic.

5. Investment Strategies During War

Investors should avoid emotional decision-making and instead anchor their approach in data, diversification, and discipline.

Defensive Strategy:

• Raise allocation to gold and sovereign bonds.

  
  

• Hold cash-rich, dividend-paying blue-chip stocks.

  
  

• Avoid excessive leverage or concentrated bets.

  
  

Opportunistic Strategy:

• Accumulate quality equities in sectors with temporary price dislocation.

  
  

• Identify beneficiaries of increased defense or infrastructure spending.

  
  

• Monitor commodity-linked stocks with pricing power.

  
  

6. Indian Market Insights

In India, markets have historically shown resilience during conflict:

Kargil War (1999): Recovered quickly due to limited economic impact and a strong earnings cycle.

Policy support, strategic reserves, and fiscal discipline have helped India navigate external shocks better than many emerging peers.

7. The Psychological Edge: Turning Fear into Discipline

Warren Buffett famously said: "Be fearful when others are greedy, and greedy when others are fearful." War is the ultimate test of investor psychology. Those who stick to fundamentals, reallocate wisely, and maintain a long-term view often emerge stronger.

Conclusion: From Uncertainty to Opportunity

While war undeniably creates short-term pain and uncertainty, it does not automatically translate to wealth destruction for disciplined investors. Markets are forward-looking, and history teaches us that conflict-induced corrections are often followed by strong recoveries. A well-researched, diversified, and strategy-led approach can help investors not only preserve capital but also position themselves for future gains.

At Pranamya Financial Services, we believe that market volatility — even during the most turbulent times — is an opportunity for long-term wealth creation when guided by informed and ethical decision-making.