Pakistan an afterthought in market eyeing future

Protesters burn a poster depicting India’s flag against what they call airspace violation by the Indian military aircrafts, in a protest in Peshawar. (Reuters pic)

HONG KONG: There’s no doubt of the seriousness underscoring the worst military standoff between India and Pakistan in decades, yet investors appear to be looking past the tension for now, at least when it comes to their stock markets.

India’s NSE Nifty 50 Index of blue-chip companies erased its gain Wednesday and the Pakistan benchmark plummeted as much as 3.8% as headlines emerged of fighter-jet skirmishes, with an Indian MiG 21 jet later reported to be shot down and its pilot captured.

The dramatic escalation came just a day after Indian forces bombed a terrorist training camp in Pakistan.

Yet by the end of Wednesday, Karachi had recovered most of its losses to settle for a mere 0.3% decline, with the Nifty 50 closing down by the same amount.

Back to business as usual, apparently. Both the Nifty 50 and the S&P BSE Sensex Index rose slightly Thursday, and Pakistan’s KSE 100 Index rebounded as much as 1.1% before trading little changed.

While Indian shares are the worst performers among major Asian markets this year, posting a decline against a stellar 8.8% rally for the broader MSCI Asia Pacific Index, foreign investors have been warming up to the country recently.

They’ve invested more than US$2.2 billion net in the market this month alone, including three days of inflows through Tuesday, the last day for which the data is available.

The US$1.7 billion added on Friday (some of which could be linked to a stake sale in Kotak Mahindra) was the most since April 2015.

Meanwhile, the options market is showing that investors are concentrating their attention further into the future.

The cost of hedging against Nifty 50 swings in the next month remains lower than protection prices for three months out, despite a rebound in the past couple of days, implied-volatility data show.

Just on Monday, the spread between the two hit its widest level since at least Sept 2017.

Prime Minister Narendra Modi faces a hotly contested general election due by May.

At the same time, the mood of markets across the region continues to vacillate with each fresh update on progress – or lack thereof – on a trade deal between the US and China, now that the original March 1 deadline has been pushed out indefinitely.

When asked in a Bloomberg Radio interview what risks investors were keeping an eye on, Kay Van-Petersen, global macro strategist with Saxo Capital Markets, said: “In the very near term we have India-Pakistan, which no one seems to take seriously given the history there.”

Indeed the two sides have long been in conflict, fighting three major wars since the 1947 partition and exchanging regular gunfire across the border.

Similar to South Koreans learning to live with decades of threats from the North, perhaps investors in the two countries may have a higher tolerance for such volatility – at least for now.