Flash Report /
Global

India, Pakistan: Kashmir flares up, same end-game (no hot military conflict)

  • Tensions in Kashmir, the region disputed by India and Pakistan, are flaring up (again)

  • Markets may go through a phase of worry over the potential for an escalation between the two nuclear powers (again)

  • We reiterate our view that an escalation to a hot military conflict is unlikely (again)

India, Pakistan: Kashmir flares up, same end-game (no hot military conflict)
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
5 August 2019
Published by

Tensions in Kashmir, the region disputed by India and Pakistan, are flaring up (again). Pakistan PM Imran Khan has warned of a potential regional crisis (again). Markets may go through a phase of worry over the potential for an escalation in conflict between the two nuclear powers (again). We reiterate our view that an escalation to a hot military conflict is unlikely (again). Material falls in asset prices on the back of this issue should be temporary (again).

In India-administered Kashmir, additional troops have been deployed, elected politicians have been put under house arrest, public meetings have been banned, mobile telecom and internet access is restricted, tourists and pilgrims have been instructed to evacuate. The exact reasons for these actions are not clear but they may be a precursor to India PM Modi implementing his party's pre-election manifesto pledge to revoke Article 35A (referred to as "Kashmir's special status", which restricts land purchases in Indian-administered Kashmir to permanent local residents).

Again, we reiterate our view that, while there is no clear and structured path to a lasting resolution of friction between India and Pakistan, a continuation of more of the same (point scoring or face-saving for a domestic political audience, intermittent clashes over the Line of Control, diplomatic sparring - over issues such as trade access, the FATF, access to nuclear supplies - mutual covert destabilisation via terror proxies on both sides, competition over influence in Afghanistan, and proxy US-China superpower conflict) is much more likely than a descent into a hot military conflict. The path to mutually assured, nuclear destruction is so short that it limits the degree to which conventional conflict can escalate.

Furthermore, in the short-term, there is a vested interest in the US to exert a moderating influence given its stated aim to draw down troops in Afghanistan (which, in turn, is made easier by Pakistan's assistance in bringing the Afghan Taliban to the negotiating table and by India's assistance in keeping the Ghani administration engaged). Also, without any major elections in the near-term, there is little populist gain in domestic politics to be had from an escalation at this moment. In light of the recent (temporary) deterioration of relations between India and the US (e.g. on trade access, Afghanistan negotiations, resumption of military sales to Pakistan, Iranian oil purchase waivers), Kashmir may be a part of a grander negotiation but there are likely cheaper ways to advance that negotiation.

Year to date, Indian equities (Sensex index) are up 1% in US$ total return terms and are on trailing price/book of 2.8x (11% ROE), which is a 4% discount to the 5-year median. Pakistan equities (the KSE100 index) are down 26% and are on trailing price/book of 1.0x (13% ROE), a 41% discount to the 5-year median.

Nuclear component is the defining part of the military comparison between India and Pakistan

Source:SIPRI


US troop drawdown: perhaps the only difference this time round

Source: US DOD, NYT, WSJ, WP, CENTCOM Quarterly Contractor Census Reports, Boots on the Ground Monthly Reports to Congress


Further reading

Trump to meet Khan: Implications for India, Pakistan, July 2019

Pakistan: Cheap enough, 10 factors to make you brave enough, July 2019

India, Pakistan: "Air strike" raises tensions, NOT likelihood of hot military conflict, February 2019

India, Pakistan: Escalation, emotion, context and MAD, February 2019 

Pakistan: FATF "Grey List" inclusion likely and immaterial, February 2018