Recent trends in global stock exchanges are leaving analysts puzzled, as markets seem to be defying even the risks of war.
There are reports that the Israeli stock exchange building was damaged after Iran launched a fresh missile attack on Israel. The conflict began last Friday, with Israel stating it aimed to prevent Iran from developing nuclear weapons.
Yet, despite a week of escalating tensions, the TA-35, Tel Aviv Stock Exchange’s main index, surged to an all-time high of 2,851.38 on Thursday.
Similarly, after the Pahalgam terrorist attack on April 22 that targeted 25 Indian tourists, tensions flared between two nuclear-armed neighbours. India launched retaliatory missile strikes on Pakistan on May 7, sparking a brief military conflict. A ceasefire was declared on May 10 following a bilateral agreement.
Surprising resilience
Against the backdrop of these conflicts, stock markets in both countries showed surprising resilience. The Pakistan Stock Exchange surged to an all-time high of 38,367.89 this month. In India, the Nifty 50 and BSE Sensex are near their respective peaks, while the Bank Nifty hit a new high earlier this month.
In contrast, the Russian stock market continues to struggle. The MOEX index had touched an all-time high of 4,292.68 in October 2021. But after the Russia-Ukraine war broke out in February 2022, it plunged to 1,841.42 by September that year. Though it rebounded to 3,487 in April 2024, the index has since moved in a narrow range and currently hovers around 2,775, still well below its peak.
With the exception of Russia, investor behaviour in most markets appears surprisingly normal, reflecting a sense of confidence.
Gone are the days when any geopolitical flare-up especially in West Asia would send markets into a tailspin. Take the First Gulf War in 1990, when Iraq invaded Kuwait, or the Iraq War in 2003: back then, equity markets worldwide suffered steep losses. A key reason was the surge in crude oil prices, which triggered a chain reaction: higher inflation, rising interest rates, and economic slowdown.
Market value
Historically, such fear led to a “flight to safety”, with investors pulling out of equities and shifting to gold, cash, or US Treasury bonds. This erased trillions in market value in just days.
But now, oil may no longer be the fear trigger it once was, thanks to the rise of electric vehicles and alternate energy pathways.
Market volatility, measured by indices like the VIX (often called the ‘fear gauge’), used to spike during such events.
So, are investors no longer worried about geopolitical tensions? It’s not so simple. While it may seem that investors are discounting conflict risks, the reality is more nuanced. Having witnessed several wars and subsequent rebounds, both foreign and domestic investors have likely become more adaptive. They’re perhaps willing to price in war risk premiums to stay invested and meet long-term goals.
Governments too appear better equipped to manage post-conflict fiscal pressures, balancing military spending with investments in healthcare, education, and infrastructure.
That said, nothing can be taken for granted. Markets and volatility are inseparable, especially in uncertain times. With valuations no longer at bargain levels, it is important to watch such developments closely.
Layering portfolios with defensive assets such as gold, dividend-paying stocks, or low-volatility funds can help navigate turbulent phases.