It is really sad to watch civilian lives being lost in wars, whether civil like in Ukraine or between countries and factions like in the Israel-Gaza conflict. The ISIS led war in Iraq and the Syria conflict are accounting for more lives lost or displaced.
India is always under threat from terrorists from across the border and has seen its fair share of terrorist acts.
Apart from disrupting lives of those directly affected by wars and terrorism, repercussions are felt across the world in political circles and markets. Every government in the world is affected by wars and terrorism, as is every economy. Export markets for goods and services shrink, there are disruptions in supply of essential commodities such as oil and investments made in affected countries lose value. However some economies also gain by supplying arms and ammunition to the war torn areas.
Financial markets too feel the heat of wars and terrorism. The single most volatile period for markets prior to the 2007-08 credit crisis was the 9-11, when terrorists hit the US. Usually when markets go into a risk averse mode, there is a rush towards safe haven assets such as US Treasuries, US Dollar and Japanese Yen and Gold. There is a sell off in emerging market currencies, equities and credit spreads.
Indian markets, when faced with global risk aversion, sees a fall in value of Indian Rupee (INR), rise in bond yields and fall in Sensex and Nifty. The reason being that FIIs would pull out money as they go into a risk averse mode.
Market falls are particularly severe if levels are at highs. The Sensex and Nifty are trading at close to record high levels of 26,000 and 7800 respectively, the INR is up by around 4.5% against the USD since January 2014 and ten year government bond yield is down 30bps since April 2014.
Will markets fall if the repercussions of the MH 17 Malaysian Airline Place crash on the 17th of July in Ukraine are severe? Probably yes as it could lead to more sanctions on Russia that in turn can disrupt oil supplies to Europe and also freeze foreign investments in Russia.
The ongoing issues in Iraq and Gaza will also come to the fore and cause anxiety to the whole region, which is the largest supplier of oil and gas to the world.
The markets will also bounce back once the tensions are diffused and some normalcy is restored. This has happened time and again since 9-11.
Investors will have to ride out volatility caused by geo political tensions. Such tensions will keep happening but if tensions do lead to a full blown world crisis that has the potential to last for long periods of time, then investors will have to pull out money from risk assets.
In the current juncture, there could be fall in Sensex and Nifty and also INR and bond prices but it is not a time to pull money out of the market. However keep following the geo political tensions around the globe to judge probability of one turning out into a full blown global crisis.