Although some believe that the wealth of investors would diminish in case of an armed conflict between Pakistan and India, many tend to disagree.

While institutional investors (banks, companies and mutual funds) are not part of a panic-prone herd, nervous small investors and their gurus firmly believe that the cold war is a good time to beat a hasty retreat from dealing with stocks.

This trend begs the question: will there be any real damage to the economy in case of limited war?

A former chairman of the country’s largest mutual fund, Tariq Iqbal Khan believes that though the initial consequence on the market could be debilitating, history suggests that short-term conflicts have a typically short-lived impact on stock markets

“The most harmful economic effect of war is a ‘supply shock’”, says a high net worth individual (HNWI) Kamran Ahmed, who claims to have invested around Rs100m in stocks at the Pakistan Stock Exchange (PSX).

He worries that when the underlying companies suffer, due to a disruption in the supply of goods and labour, damage to infrastructure and the peril of high inflation, all of which could lead to a scar on profitability, it will make sense to jump out of stocks and park money in safe havens.

Investors also see such risks as possible international sanctions, a disruption in oil supply, unemployment, devaluation, depletion of foreign exchange reserves and flight of foreign portfolio investment in case of a war.

But a former chairman of the country’s largest mutual fund, Tariq Iqbal Khan believes that though the initial consequence on the market could be debilitating, history suggests that short-term conflicts have a typically short-lived impact on stock markets.

In support of his argument he refers to the effect of the post 9/11 attack on Afghanistan, on Pakistan’s equity market. “After bleeding for 3-4 days the stocks recovered and foreign funds made an astounding heavy investment of $300m in the Pakistani market”.

The impact of an impending’’ war and an actual war could be quite different, said a stockbroker, who asked not to be named.

Consider the trading session on Sept 21. The PSX’s KSE-100 index plunged by 569 points or 1.41pc, wiping out all of the gains accrued during that month as investors mistook unscheduled closure of airspace in the northern part of the country, coinciding with stepped-up flights by the Air Force, as a signal of an imminent outbreak of war.

But as the dust settled, the KSE-100 index bounced back by 363 points the very next session recovering a good part of the losses suffered a day earlier.

Relating to the impact of war on Wall Street, Adam Shell wrote in USA Today: “In 14 shocks (of war) dating back to the attack on Pearl Harbour in Dec 1941, the median one-day (stock) decline has been 2.4pc. Those shocks which also include the Sept 11 terror attacks and the 1961 Cuban missile crisis lasted eight days with total loss of 7.4pc”. And Adam concludes: “The market recouped its losses 14 days later”.

A parallel record of local stock market behaviour during and after the earlier two wars could not be found. A veteran recalled that the market had been closed down during the 1971 war with India. “But the market capitalisation at the time was Rs5.66bn, which is just a fraction of the current capitalisation of Rs8tn” said one.

An octogenarian captain of civil airlines who was a witness to both wars and now earns his livelihood through stock trading, scoffed at taking the ravages of a conflict so lightly. “The reason that Wall Street absorbed all those shocks was that the US, at the time, was a high GDP growth economy”, he said, suggesting that war could be crippling to our economy, for where does Pakistan stand at present?

Exports are declining; the current account deficit is widening; the last tranche of the IMF was received last week and repayment will now begin. “Is it easy to fight a war with only $23bn in reserves?” he asked.

Early Thursday morning skirmishes along the Line of Control sent shares reeling down on both the Mumbai and Pakistan Stock Exchange.

The Indian broader NSE stock index tumbled 1.8pc after they were hammered by as much 2.1pc to its lowest since Aug 29, while the KSE-100 index fell 0.52pc as investors ran for cover.

Conversely, there is no dearth of stock market experts who genuinely believe that it is a time to buy when nervous investors are ditching stocks cheap.

Published in Dawn, Business & Finance weekly, October 3rd, 2016