Indian Stock Markets

Impact of India China Border Conflict on Indian Stock Market

Since April, Indo-China border specially the Indian area of Galwan valley has become the flashpoint in between India China conflict. On 15th June China engineered an ambush in the Galwan valley region of Ladakh. This has further escalated the tension to a new high between these regional powers.

The current piece will be focus on below pointers.

  • Current situation at the Line of Actual Control
  • Possibility of a full-fledged war between China and India & allied forces
  • Impact of the current situation on Indian Stock Markets
  • What you should do to maximize benefit out of the present-day ongoing conflict

So, let’s explore each pointer one by one.

Current situation at the Line of Actual Control

As per reports, 20 Indian soldiers were martyred whereas 43-35 Chinese soldiers were killed. After a series of failed talks, both nations have decided not to move armies an inch behind and may be, with time the tension may vent out of the region.


We should also understand that the tension is not restricted to Galwan valley, in May there was a zero-bullet skirmish between the army personnel at Sikkim border

Amid the conflict, the government of India has also decided not to stop the ongoing road construction projects in the border areas, this move has made the Beijing to become a cry baby at international forums and NEWS portals.

As per satellite images, there is a significant amount forces lined up in the region and therefore we may expect some serious outcomes for Beijing and New Delhi. It is also expected that the diplomatic relation may deteriorate with time

Possibility of a full-fledged war between China and India & allied forces

Instead of believing the media reports let’s factually scrutinize the cost benefit analysis of the crisis for china in general and for Xi Jinping in particular.

Benefit for Xi Jinping

Context:

Even though china has one party system but in a given point of time, you will find ‘n’ number of contenders willing to grab the pinnacle position in the Chinese Communist Party. With time, Xi’s popularity has nose-dived in the party and in the country because of economic and geo-political reasons. To regain the trust of its population, Jinping is trying to leverage the anti-India sentiment so instead of questioning his capability, people will be forced to support the supreme leader.  

Benefit:

Be it the first world country or the third world country, Nationalism has always been a single factor which unites the country. Therefore, there is a high chance that Xi Jinping may be able to polarize the Chinese sentiments in his favour and would be able to extend is reign for at least a couple of decades. 

Consequences/Cost:

China will have to face the following consequences: –

  • Relations with India and other democracies will deteriorate because of expansionist philosophy
  • Loss of access to Indian markets because of boiling anti-china feelings among India population
  • Isolation at International forums like G20, WHO, Security council etc
  • If war happens between the Red Army and the Indian Army and If china is defeated in the war, then China is bound to loose Tibet, Taiwan, so called South China Sea and may be the region of Hong Kong

Benefits for China

Context

Along with the above highlighted context, we should also consider a larger picture which might have made the Chinese government to become a bit more aggressive towards India.

We will tell the story in two parts; In the first part we will talk about the history. Broadly we can categorise china in two eras i) pre-mao zedong era ii) post mao zedong era

  1. Pre-mao zedong China was timid, lost many battles and was the colony of the British empire. Many thinks China was powerless in front of western society. Century of humiliation is in the minds of Chinese people. We are aware of opium wars between Qing dynasty and western powers.
  2. Post-mao zedong china was aggressive and focused on becoming more powerful so that in the long run china become the world power.

Mao Zedong started an era where china wanted to become the world power by adopting the soft diplomacy, meaning using carrot and stick policy as and when needed.

In present day scenario, the Communist Party of China has inherited the vision of Mao to become a super power in coming decades but at the same time, china has made a 180-degree shift in diplomacy where diplomats and china take strong stance ignoring other powers.

Part two of the story begins when the Indian government decided to scrap article 370 to integrate Jammu & Kashmir with India in spirit. After some time, actions of Indian government suggested that India is keen to get back the Pak occupied Kashmir anytime soon. Subsequently, the state media started showing the weather conditions and forecasts for Pak occupied Kashmir. As we understand this might have made the china more aggressive.

China wants to control the world trade through infrastructure and connectivity. If India takes the region of PoK then this may hamper the Chinese ambition as the ongoing CPEC project would be stalled with billions of dollars getting wasted, not only that this may also hinder the superpower dream of china.  

It appears that due to covid 19 pandemic, India has a given hiatus to integration of PoK with India and at the same time china has identified the opportunity to rage a conflict and may be a war to tame down India’s aspiration.        

Potential Benefit for China

  • Now if china rages a war and wins it then it will establish a world dominance as then it would be showcasing the world of its potential

consequences  

  • If china loses the war, which is highly likely, then china will loose
    • Tibet
    • Taiwan
    • Claim over the so-called south china sea
    • Hong Kong
    • Aksai Chin
    • Other territory
    • The reputation
    • Access to markets
    • Heavy penalties/repatriation

Possibility of a war

The conflict created by China has the potential to get a place in history books.

Xi Jinping doesn’t care for values and principles and to secure his position he has amended the constitution of china in 2018 to become the “president for life”. Now to maintain this for coming decades, China has to be belligerent. Indo china war could be the first and may be the important stage where Xi Jingping could be thinking to achieve multiple results.

Therefore, India should be careful and accordingly prepare itself for any unfavourable move by china. Without getting more into geo political situation, lets assess the impact of the situation on the Indian equity markets. 

It is highly likely that India china may get involved in a war, in near future. The war is expected to have multiple countries supporting either regional powers.

Impact of the current situation on Indian Stock Markets

Usually, geo political crisis impact stock markets severely depending on the timing and the magnitude.

Short term Impacts:

It appears that Indian stock market has factored in the short-term impact of Galwan valley crisis. Therefore, in the given situation, Investors will not face heat as such.

Mid-term impact:

Given the history of china with respect to honouring agreements & contracts, one may expect China to be aggressively forcing India not to pursue its ambition of integrating PoK with India. Whereas the Modi government is firm in getting back the remaining part of Kashmir. In a such situation, the stock markets may nosedive, by significant amount to justify the valuation versus earnings. Further, in the coming 3-6 months, we may start to see the impact of coronavirus in the earnings of many listed companies. Therefore, NIFTY 50 may not break its previous high of 12,000+ as there is no growth drivers for the Indian markets. Core sectors like Banking and Automobile may drag the NIFTY down as there would be low demand from the retail side.   

Long term impact:

It’s very hard to predict the long-term impact of the ongoing crisis but let’s consider important factors to draw some inferences.

  • Pharma industry may see an upward trend as with time one may see the arrival of coronavirus medicines and vaccines soon.
  • Electronic & Communication Devices industry may see heavy import duties thereby leading to reduced top-line and bottom-line of the involved companies.
  • Tyre manufacturers may experience heavy import duties too, so one can avoid this sector.
  • As usual FMCG could become a safe bet as even in the crisis situation general population hardly avoid FMCG consumption

What you should do to maximize benefit out of the present-day ongoing conflict

The better investment strategy would be to maximize the opportunity by mitigating the risks posed by the ongoing situation. This would be mean, that one can look forward to stable sectors like FMCG, Power Generation, Pharma etc. let’s understand this in a bit detail.

Fund allocation strategy

As the situation is grim at border areas and also it appears that covid 19 is posing a serious economic challenge to global economy so instead of investing 100% funds in equities in a single go, lets rationalize the investment strategy so that we protect our hard-earned money against any odd.

So, at current levels, anyone can investment 55%-60% of the total investment corpus in equities in robust segments and the remaining amount could be invested either in debt funds or gold as this would be less volatile against unforeseen conditions. If there is any downside movement in the markets due to indo-china conflict then the remaining amount can be invested.

Industry Dynamics

Short Term Outlook: In the short term, Pharma, FMCG, Power Sector & Defence sectors offer favourable risk to reward ratio.

Pharma Industry: India caters close to 60%-70% generic medicine demand of the world population. Countries like US, Brazil & Europe have shown great faith in Indian pharma companies. In the past couple of months, the western world has shown a great demand for HCQ. So, companies producing HCQ is expected to gain a lot from this turmoil.

Companies manufacturing Tamiflu and other recently identified covid19 drugs will get benefits in the short term.

FMCG: conventionally FMCG sector is considered as a safe bet, as humans don’t leave consuming eatables & FMCG products even during a crisis. In fact, as per reports, Parle G has recently witnessed the best month in terms of sales. So, companies like HUL, Dabur, Marico etc are expected to gain out of this situation. Also, the demand for sanitizers have skyrocketed since the advent of covid 19.  

Power Sector: Even when the country was under a lockdown for weeks, but still the consumption of electricity was never down, in fact the consumption might have gone up due to warmer months in the country.

Defence: Due to crisis at Galwan, the Indian Govt might be interested in scaling up the production of arms and ammunitions and defence equipment, So one can certainly look forward to this sector as the defence of any country is not built in a year or two and therefore, it requires decades to build stronger systems. So contracts given at the point is going to generate revenues for multiple years.     

OTT + Telecomm & Communication:

All major companies have opted to work from culture and this has increased the demand for telecommunication services and the internet connection. All listed companies in this sector are expected to gain out of this situation. In fact, one may see plans upgradation for better internet speed and more data packages.

OTT: Many have turned to OTT as a pass time platform; therefore, providers are expected to gain a lot out of this lockdown.

Sectors to avoid in the short term:

  • Banking & NBFC, Auto, Travel & Tourism, Construction, Cement.

Long term outlook:

There are many companies trying to make vaccines for covid19, but the benefit may come in the long term only, as the process of vaccine creation takes usually 8-12 years, but due to the dire need of the vaccine and the concentrated efforts across the world, we may see a vaccine in and around 6-15 months going forward. Therefore, we should also understand the impact of the ongoing crisis at the border and as well as the covid 19 on the markets.

Pharma Industry: In the long-term margins of pharma sector is expected to improve as the manufacturing of API (active pharmaceutical ingredients) is going to increase in India due to aatmnirbhar bharat project. API is basically an input in drug manufacturing. By insourcing the API manufacturing in India, government will be trying to reduce dependency on china, it is expected that pharma companies will be taking up the job and hence the benefit would be reflected in the balance sheet.

Even the manufacturing of remdesivir and other covid drugs and vaccine by Indian pharma companies will certainly benefit the Indian economy.

Therefore, the long term outlook of the industry is positive.

FMCG: FMCG is expected to have a better growth rate compared to other industry as population in general can’t leave consuming FMCG products be it atta or hand sanitizer. Therefore, one can certainly bet on this industry by picking up the right stocks.  

Power Sector: Be it 1990 or 2020, the importance of power sector can’t be ignored, therefore companies like REC is expected to be business for long without getting a dent on the revenue stream, therefore one can expect to protect their investment by investing in the 24*7 operational companies.

Defence: To give a boost to make in India initiatives and the build a firearm muscle govt, will ask private players to take up the job producing arms and ammunition for the country to counter threats like china in future too .     

OTT + Telecomm & Communication:

After JIO diluted close to 25% of its equity to Facebook and other PE firms, JIO is expected to get access to WhatsApp, this will certainly open new avenues for JIO. Not only that, JIO is launching JIO Mart across the country in near future, this will certainly give the company a boost in terms of reach and revenue.

In couple of years, even 5G is expected to hit the Indian markets, which will integrate AI and telecommunication. Such innovations usually disrupt the market and thereby creating a winner for life.

OTT: With big banner movies getting a direct listing at platforms like Netflix, Amazon prime, one can expect new subscribers to join such platforms rapidly. So, one can see a growth in line with the growth of ecommerce sector of India has seen.

Auto: Although, in the short term, auto sector is hit badly but as the economy improves, people will be more inclined towards personal vehicles so as to avoid corona as much as possible. Maruti could emerge as a prominent player, given the fact that Indian middle class holds a positive view on the company.

Banking & NBFC: Although the rates are being reduced by RBI, the demand for loans will increase only if banks and institutions pass on the benefit to consumers. Once the job market improves then we can see a demand for credit, companies like SBI Cards (Currently I am holding this stock), ICICI, HDFC is expected to see the growth.

Insurance: Till now Indian population has seen the insurance instruments a tax saving device but as the covid 19 proved that no one can predict uncertainty, hence people may prefer cheaper insurance instruments like term life insurance plans. Already, USA has seen a demand surge for life insurance policies during the covid times and sooner or later India may see the similar spike for Indian insurance products, subject to job availability to Indian masses.   

Sectors to avoid in the long term:

Travel & Tourism, multiplex stocks like INOX,

Conclusion:

Although Indian market is trading above 10,000 psychological mark but the FY2020-2021 is expected to witness a negative growth for Indian economy, therefore this may limit the upward movement for Nifty 50 rather china has been deceptive wrt to border issue, as per the latest reports, china is increase the military strength behind the veil of talks. Therefore, if there is a war then markets are bound to move down below 7800-8200 mark. One can certainly accumulate good stocks at that point to maximize the gains.

At current levels don’t invest more than 55-60% of the corpus. 

(Note: The above list is for information purpose only. Therefore, you’re advised to conduct proper due diligence before investing in equities).