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.
