Impact of Wars on Equity Markets and Macroeconomic Indicators

From the Kargil peaks to the deserts of Kuwait, history shows that while wars may rattle investors and trigger short-term panic, markets often bounce back with surprising resilience. This article explores how major geopolitical conflicts—from the India–Pakistan standoffs to global wars like Iraq and Ukraine—impact equity markets and key macroeconomic indicators. More importantly, it distils actionable insights for investors on navigating market turbulence during times of war 

Geopolitical conflicts have historically caused volatility in financial markets. While wars often lead to short-term market disruptions, markets usually recover and align with long-term economic trends. This article examines the impact of wars, both in the Indian subcontinent and globally, on equity markets and key macroeconomic indicators over time. It focuses on conflicts such as the India–Pakistan wars and major global conflicts like the Gulf War, Iraq War, and the ongoing Russia–Ukraine War, and provides insights on how investors can navigate wartime market turbulence. 

India–Pakistan Conflicts:
Market Reactions and Economic Impact
India's military conflicts with Pakistan, particularly since 1950, offer valuable insights into market behaviour during geopolitical tensions. The most recent instance is Operation Sindoor, a retaliatory strike against terrorist camps in Pakistan and PoK in May 2025. Such conflicts often spark fears of full-scale war, causing short-term market panic. However, historical trends show that India's equity markets have demonstrated significant resilience. 

For example, during the Uri Surgical Strike in September 2016, the BSE Sensex index experienced only a minor dip of 1.19 per cent between September 19 and September 28, 2016. In the year following the attack, the index surged by 11.3 per cent, despite a 1.24 per cent dip one month post-incident. Similarly, the Balakot Airstrike in February 2019 caused minimal market disturbance, with the Sensex dropping by only 1.46 per cent on the strike day and gaining 8.51 per cent in the subsequent month. 

The Kargil War (May–July 1999) was the most significant of these conflicts. While the Sensex fell by around eight per cent before the conflict, it surged by an impressive 36.6 per cent during the war and increased by 4.78 per cent one month later. These events highlight a crucial lesson: limited military actions often have minimal and short-lived market impacts, with significant rebounds following conflict resolution. 

Graph: BSE Sensex Returns Around Key India– Pakistan Conflicts 

The Indian economy has shown resilience through these conflicts, with even major wars like the Kargil War having a relatively mild impact on GDP growth. For instance, India's GDP grew by 8.9 per cent in FY2000, following the Kargil War in 1999, when the economy grew by 6.18 per cent. However, larger wars, such as the Indo-Pak War of 1965 and the Bangladesh Liberation War of 1971, had a sharper impact on inflation and fiscal deficits due to war-induced government spending. 

Major Global Conflicts: Market Reactions and Comparisons 

While regional conflicts like those between India and Pakistan have limited impact, global wars tend to create widespread disruption in financial markets and economies. Several key global conflicts illustrate how markets react to war: 

• 1990–91 Gulf War (Iraq’s invasion of Kuwait) - This conflict initially doubled oil prices, causing a downward spiral in global equity markets. However, after the swift military victory in Operation Desert Storm, markets rebounded sharply, with the S&P 500, a major U.S. equity index, returning 30.5 per cent for the full year 1991.
• 2003 Iraq War (U.S.-led invasion) - The lead-up to the Iraq War saw cautious market reactions, but once it became clear that the U.S. would prevail quickly, markets responded positively. The S&P 500 surged 26 per cent in 2003, marking the start of a bull market.
• 2022–present Russia–Ukraine War - The initial invasion triggered risk-off market sentiment, significantly impacting European stocks. Global oil prices surged, and market volatility remained high throughout 2022. Despite the war’s prolonged nature, many markets began recovering by late 2022. Energy and defence sectors performed particularly well, while economies adapted to the changing geopolitical landscape. 
   

Macroeconomic Trends During Wartime
Wars exert significant pressure on the global economy, often causing inflationary shocks and fiscal imbalances. The cost of war depends on its scale and varies from country to country. In the India–Pakistan scenario, a short-term conventional war, according to the 'Foreign Affairs Forum', could cost India between ₹1,460 crore and ₹5,000 crore per day in direct military expenses. 

The following macroeconomic indicators are typically impacted during wartime:
1. GDP Growth:

• India’s GDP growth during conflicts, such as the Kargil War, saw only a temporary dip. In contrast, larger conflicts, such as the 1971 Bangladesh War, witnessed a more severe dip in GDP growth.

Globally, wars tend to depress GDP growth in affected regions. For instance, the Gulf War caused a mild recession in the U.S. in 1991, while the Russia– Ukraine War significantly slowed global growth.

2. Inflation (CPI/WPI):

• War-induced inflation, especially in commodity prices, is common. For example, the Gulf War led to an oil price spike, pushing inflation in the U.S. and the UK to 5.4 per cent and 9 per cent, respectively.
• Similarly, the Russia–Ukraine War contributed to an inflationary shock, particularly in Europe, where energy prices soared, driving inflation to unprecedented levels.

3. Fiscal Deficits and Government Debt:

• Wars lead to significant increases in government spending, often resulting in higher fiscal deficits. India’s fiscal deficit increased during conflicts like the 1971 Bangladesh War and the 1962 Sino-Indian War.
• Global examples include the U.S. fiscal deficit widening during the Iraq War and European countries increasing defence spending during the Russia–Ukraine War. 

Short-Term Volatility vs. Long-Term Market Resilience

A key takeaway from studying market behaviour during wars is the distinction between short-term volatility and long-term resilience. In the short term, markets react quickly to conflicts, often overreacting due to fear and uncertainty, leading to sell-offs and market corrections. However, over the long term, equity markets tend to rebound once the uncertainty of the conflict is resolved. 

The recovery is often faster than expected. For instance, after the Gulf War in 1991 and the Iraq War in 2003, markets not only recovered but also embarked on strong bull runs. Similarly, India’s Nifty 50 index showed resilience in the years following limited conflicts, such as Kargil, Uri, and Balakot. 

Investor Strategies During Wartime

Navigating investments during wartime requires a balanced approach. Here are some strategies for investors during geopolitical turmoil:

1. Stay Disciplined with Long-Term Plans: Continue investing systematically even during periods of high volatility. Historical trends show that panic selling during wartime often leads to missed opportunities.

2. Use Staggered Deployment of Investments: If you have a lump sum to invest, consider deploying it in phases. This allows you to average the cost of investment and take advantage of market dips during the conflict.

3. Tilt Towards Resilient Sectors: Some sectors, such as defence, energy, and commodities, tend to perform well during wartime. Consider overweighting these sectors in your portfolio if you're comfortable with tactical adjustments.

4. Risk Management and Hedging: During wartime, ensure your portfolio is protected from extreme downside risks. This can include holding some cash, using stop-losses, or even hedging through options.

5. Rely on Facts and Data, Not Rumours: During times of conflict, misinformation can spread quickly. Stick to reliable sources of information and avoid making decisions based on panic-driven news or social media. 

Conclusion

Wars and geopolitical conflicts inevitably bring about volatility and uncertainty in financial markets. However, historical records suggest that equity markets exhibit remarkable resilience over the long term. While short-term disruptions, such as inflation spikes, fiscal deficits, and GDP slowdowns, are common during wartime, these effects tend to be temporary. As geopolitical risks subside, markets recover and even thrive. 

For investors, the key is to avoid panic selling during crises and to stick with long-term investment strategies. History has shown that those who stay calm, maintain disciplined investment plans, and diversify their portfolios are typically rewarded when the dust settles. Understanding macroeconomic trends, staying informed, and adhering to prudent asset allocation strategies are crucial in navigating wartime volatility. 

In the end, investors who focus on fundamentals, stay diversified, and embrace a long-term outlook will continue to benefit from the enduring resilience of global markets. Even in the face of war, human economies adapt, rebuild, and move forward, and so do financial markets.