Even as India-Pakistan tensions remain high following India's Operation Sindoor against terrorists based out of Pakistan and Pakistan-occupied Kashmir (PoK) to settle the score after Pahalgam attack, stock market analysts are not factoring in the likelihood of a full-scale war and positioning portfolios accordingly.

“The risk of a full-scale war between the two neighbours is not envisaged in our scenarios,” said Venugopal Garre of global brokerage firm Bernstein. “Historically, markets have dropped to varying degrees during such events… but have rebounded on all occasions. Buy-the-dip is the best strategy if equity markets decline.”

The narrative of geopolitical panic triggering a deep, prolonged market crash just doesn’t hold up to data. Over the last five India-Pakistan military episodes which includes Kargil and Balakot, Nifty 50 corrected 5% on an average before rebounding with double-digit gains over the next six months.

Amnish Aggarwal from Prabhudas Lilladher said if there is no further escalation of conflict between India and Pakistan, then things will settle and the market can move upward.

Investors must resist the temptation to make hasty decisions. As Dr. Vikas Gupta puts it, “Long-term investors should keep a watchlist of promising stocks and sectors. There’s no need to panic or get caught in FOMO. Instead, focus on high-quality stocks with strong growth potential.”

His Scientific Investing framework flags opportunities in banks, power, logistics, housing finance, and EPC firms—sectors showing favourable valuations and capital efficiency. Defence stocks are also in focus, not for wartime hysteria, but because government capex in the sector may accelerate regardless of escalation.

That nuance matters.

“The market is unlikely to be impacted by India’s retaliatory strike since that was known and discounted,” said Dr. V.K. Vijayakumar, Chief Investment Strategist at Geojit. “What’s driving resilience is ₹43,940 crore of FII inflows over the last 14 trading days. Global macros and India’s growth story are in the driver’s seat.”

Also read | Nifty muscle memory check: India-Pakistan conflicts have meant 5% dip. Will this time be different? That story, analysts say, doesn’t get derailed unless tensions spiral out of control.

“As long as escalation is avoided, India’s economic growth trajectory is unlikely to face any major setbacks,” said Abhishek Jaiswal, fund manager at Finavenue. “Markets may react cautiously to such developments, but tend to recover—and often outperform—soon after.”

Despite the political drama, the Indian stock market has been remarkably resilient, driven by both foreign portfolio investors (FPIs) and domestic inflows. In fact, Nilesh Shah from Kotak Mahindra suggests, "We never would have expected FPIs to turn aggressive buyers during a conflict with Pakistan, but their buying—along with local flows—has helped pull the market up."

Where to invest: What the smart money is watching

As fears of a major escalation fade, investors are pivoting from protection to positioning. Here’s where analysts say the opportunities lie:

• Largecaps over mid & smallcaps: FIIs are showing a clear preference for largecaps, especially after the recent froth in mid and smallcap valuations. “This trend can continue,” says Dr. V.K. Vijayakumar of Geojit.
• Defence stocks: With “Operation Sindoor” shining a spotlight on national security, companies like Bharat Forge, Paras Defence, Solar Industries, and Bharat Dynamics are in focus. The former two may benefit over the medium term, while the latter could see near-term order upticks. But beware—valuations are rich, with Solar and Bharat Dynamics trading at ~59x and ~51x forward earnings, respectively.
• Banks & Financials: Dr. Vikas Gupta’s framework highlights banks and housing finance as capital-efficient plays with room for growth. Bernstein too remains overweight on financials.
• Power, Utilities & Logistics: These are sectors with visibility and long-term demand tailwinds. They’re also benefitting from a tilt toward defensives.
• Telecom & EPC: Bernstein sees no major macro impact and continues to back telecom and infra-linked names. Meanwhile, OmniScience’s framework includes EPC/Infra construction firms among potential capital multipliers.
• Stay away from panic plays: Tourism-exposed names may face hiccups, but exposure is limited. The key is to avoid emotional trades and focus on high-quality stocks with earnings resilience.

Also read | Surgical strikes, steady stocks: Why Sensex, Nifty aren't flinching after India's strikes on Pakistan (Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)