The markets are in absolute tizzy with the Sensex and Nifty 50 nearly 14% off their highs. Geopolitical turmoil be it war or terror attack or pandemic, have consistently triggered sharp bouts of sell-off across Indian markets. But it’s not all gloom and doom. Historical data suggests that these periods have been followed by period of strong positive returns for investors who drank the bitter pill of patience.
Data, shared on social network platform X, by well known investor Porinju Veliyath, the Founder & CEO of Equity Intelligence India, shows how Sensex has responded to crises in the past. While initially a knee-jerk reaction is seen in the markets, but over the medium-term more often than not has been positive.
Sharp falls mark the immediate aftermath
The first phase of any geopolitical shock is almost always defined by fear-driven selling. Events such as the Gulf War, the 9/11 attacks, the collapse of Lehman Brothers, and the Covid-19 pandemic triggered immediate sell-off with the Sensex fall ranging from single-digit drops to falls of over 30%.
For example, during the Lehman Brothers’ collapse in 2008, the Sensex plunged nearly 29% and in early 2020, when the world was in the grip of Covid-19, the key benchmark Index saw a sharp fall of about 37% within a month.
Recovery follows once uncertainty stabilises
Historical data indicates that the markets are likely to stabilise and recover once the initial shock is over. On average, the Sensex has delivered gains of over 10% within three months of such events. The recovery strengthens over time, with average returns rising to nearly 17% in six months and almost 26% over nine months.
This rebound could be due to attractive valuations following the sell-off as investors gradually return, which further fuels the recovery.
A consistent pattern across crises
Whether it was the Asian financial crisis, the Kargil war, the European debt crisis, or the Covid-19 pandemic, the result remained broadly similar: a sharp fall followed by a steady recovery. What stood out is the consistency of this pattern across different types of crises.
Even in cases where the initial impact was severe, markets eventually rebounded strongly. In several instances, the Sensex not only recovered losses but went on to deliver substantial gains within months.
Long-term investors stand to benefit
For long-term investors, data indicates that reacting impulsively to geopolitical crises could be counterproductive. Instead, sharp corrections need to be seen as opportunities to buy quality counters at attractive valuations.
As history shows, while crises may dominate sell-offs in the short term, markets tend to look beyond them.