Can India be a hedge against US recession? | Wilnesh News

This report comes from this week’s CNBC “Inside India” newsletter, which brings you timely, insightful news and market commentary on the emerging powerhouse and the big players behind its meteoric rise. Like what you see? You can subscribe here.

The Bank of Japan’s unexpected interest rate hike and the Federal Reserve’s willingness to “put a rate cut on the table” in September have pushed global stock markets to the brink of collapse.

Disappointing U.S. jobs report follows In the end, the stock market was pushed to the cliff, ruining the feast of investors.

Assessing the current state of the global economy can partially address this issue. While Europe is struggling and China’s economy is slowing, India is booming.

Venugopal Garre, head of India research at Bernstein, told clients this week that such disjointed global economic conditions mean “macroeconomic woes in the United States are unlikely to become a global event in 2025.” Bank failures in the United States and Europe in 2023 and China’s multi-year housing market slump demonstrate that the impact of major shocks is localized rather than spreading globally.

Historically, US-led recessions have typically resulted in flows into safe-haven assets, e.g. Dollar, Treasury bonds and gold. In contrast, risk assets such as stocks and emerging market currencies fell. depreciated indian rupeeThis week’s record lows against the US dollar will weaken total returns in dollars, euros or pounds, potentially for foreign investors.

However, Garre said the Reserve Bank of India’s decision this week to keep interest rates on hold at 6.5%, while inflation continues to inch lower amid strong GDP growth, could help mitigate the severity of the rupee sell-off.

The rupee may also partially benefit from the US recession if commodity prices collapse. As a net energy importer, India is highly sensitive to crude oil prices. A fall in Brent crude oil prices caused by the U.S. recession could help support the Indian currency.

More broadly, the Indian economy is also consumer-driven, unlike China and Japan, which rely on exports. Data shows that the United States is not the main destination for India’s manufactured exports. Services such as IT and business process outsourcing, which account for 75% of exports, are unlikely to suddenly lose competitiveness.

“Even if the U.S. goes into recession, the fundamentals of the economy will not change,” Bernstein’s Garay said. “As a result, short-term adjustments … will not necessarily have long-term consequences, and we believe the risk of a U.S. recession is limited — If that is indeed the case.”

Elsewhere, the Indian government – after Prime Minister Narendra Modi suffered a major election blow – has also taken steps to mature the economy. Investors welcomed lower budget deficit forecasts and self-restraint in the latest spending pledges, which could help boost stock prices.

“Ultimately, India is likely to move into a near-equilibrium state, which would support corporate leverage, private investment and profits as a share of GDP,” Morgan Stanley equity strategist Ridham Desai said in a note to clients this month. share hit a new high.

“The consequent rise in share prices will also be accompanied by a further increase in equity allocations on household balance sheets, a large global allocation to Indian equities (reflecting rising Indian index weightings), increased corporate issuance and new equity valuations. peak.

However, not everyone agrees with the idea that India could serve as a hedge if the United States goes into recession.

“I wouldn’t say India will completely disengage, but I think India is in a good position to deal with the volatility noise,” said John Ewart, portfolio manager of Aubrey Capital’s $600 million global emerging markets fund. A better position. More than half of Ewart’s funds are invested in India.

“The companies we’re covering are not affected by the short-term noise we’re seeing and reading from speculation about what the next Fed rate cut might be, when it might come, or what’s happening with the yen,” Ewart said. added. His fund’s major holdings are Varun Beverages – the distributor of Pepsi-Cola, food delivery company Zomato and real estate developer Macrotech.

In fact, Bernstein’s Garay said the “enemy is within” for Indian stocks. A major risk for investors is the high valuations of stocks in the current environment. Indian stocks continue to hit record highs even as analysts cut their profit forecasts for nearly half of the 200 largest Indian companies by 1%.

The strategist noted that despite two days of sharp selling, Indian stocks remain “highly valued but lack earnings support.”

Indian nifty 50 Now performing better than S&P 500 Index. As noted, the benchmark has soared 11.8% year to date, outpacing the S&P 500’s 9% gain, and analysts told CNBC the index could head higher. Traders are increasingly expecting the Federal Reserve to cut interest rates in September, an environment that could boost Indian stocks.

Indian stocks fell 2.4% this week along with global equities. this nifty 50 The index has remained above 24,000 points since hitting 25,000 points for the first time last week. The index has gained 11% this year.