Amid escalating tensions between India and Pakistan following India's "Operation Sindoor," defence stocks have come into sharp focus, experiencing significant volatility. The broader market has reacted to the geopolitical uncertainty, with investors closely monitoring developments.

Market Reactions and Analysis

On May 7, 2025, Indian defence stocks initially traded flat before tumbling, despite the heightened tensions. Shares of Bharat Dynamics, Hindustan Aeronautics, Bharat Electronics, and BEML fell by up to 6.12%. Similarly, shipbuilding stocks like Mazagon Dock Shipbuilders, Garden Reach Shipbuilders, and Cochin Shipyard also declined. This downturn led to a nearly 2% drop in the Nifty Defence index. This initial downturn was attributed to profit-booking after a prior rally, rich valuations and a "wait-and-see" approach by investors amidst geopolitical risks. However, some stocks, such as Bharat Dynamics and Mazagon Dock, recovered later, possibly due to reassessment of long-term benefits from increased defence spending.

Conversely, Chinese defence stocks have seen a surge. Shares of AVIC Chengdu Aircraft, which manufactures the J-17 and J-10C fighter aircraft used by the Pakistani Air Force, surged by 20% on Thursday, after a 17.05% gain on Wednesday. AVIC Aerospace also saw its Hong Kong-listed shares rise. This increase is likely driven by the perception that Pakistan will be forced to upgrade its air capabilities.

Geopolitical Context

Tensions between India and Pakistan have escalated following a deadly attack in Indian-administered Kashmir's Pahalgam on April 22, which India blamed on Pakistan. Pakistan has denied any involvement. On May 7, 2025, India launched "Operation Sindoor," conducting missile strikes on alleged militant infrastructure in Pakistani territory and Pakistan-administered Kashmir. Pakistan retaliated, claiming to have shot down five Indian fighter jets, a claim India has yet to respond to. Pakistan's National Security Committee has authorized its armed forces to retaliate against India's attacks.

Impact on Financial Markets

The escalating conflict has had a palpable impact on financial markets. India's Sensex and Nifty indices experienced a drop, reflecting investor uncertainty. In contrast, the Pakistan Stock Exchange faced a sharp crash, with the benchmark KSE-30 Index plummeting before recovering some losses. Trading in Karachi was temporarily halted after a 7% crash.

Analyst Perspectives

Despite the volatility, market experts suggest no major immediate impact on the Indian stock market, as the strikes were calculated and limited in scope. Some analysts believe that if the conflict does not escalate further, the market will likely stabilize and move upwards. They advise investors to avoid hasty decisions based on short-term geopolitical events and to focus on high-quality stocks with strong growth potential. Sectors like banks, power, logistics, housing finance, and EPC firms are expected to maintain favorable valuations and capital efficiency. Increased government capital expenditure in the defence sector, regardless of the conflict's escalation, could also benefit defence stocks.

Global Implications

The U.S. has stated it will not get involved in the conflict but encourages de-escalation. Turkey has urged dialogue amid rising hostilities. The situation remains fluid, and further developments in the India-Pakistan scenario will likely continue to influence the performance of defence stocks. The conflict's economic ripples could potentially extend globally, especially considering China's role as a major arms supplier to Pakistan.