Could India be a hedge against the US recession?

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A surprise rate hike by the Bank of Japan and the Federal Reserve’s willingness to put a rate cut “on the table” in September sent global stock markets on the brink.

Then came a disappointing US jobs report ultimately pushed stocks off the cliff and spoiled the party for investors.

Taking stock of current economic conditions worldwide could partially answer this question. While Europe struggles and China slows, India is booming.

Such a disjointed global economic picture means “it is unlikely that a US macroeconomic malaise will become a global event in 2025,” Venugopal Garre, head of India research at Bernstein, told clients this week. Bank failures in the US and Europe in 2023 and the multi-year housing slump in China provide indications that the impact of major shocks is contained rather than allowed to spread across the globe.

Historically, a US-led recession usually leads to capital flows into safe-haven assets such as US dollarsvaults and gold. Conversely, risk assets such as stocks and emerging market currencies fall. An understatement Indian rupeewhich hit a record low this week against the dollar, will reduce overall returns in US dollars, euros or sterling, as the case may be for foreign investors.

However, the interest rate differential created by the Reserve Bank of India’s decision this week to hold rates at 6.5% while inflation continues to ease amid strong GDP growth may help cushion the severity of a rupee selloff. , according to Garre.

The rupee may also partially benefit from the US recession if commodity prices fall. As a net energy importer, India is highly sensitive to crude oil prices. A US recession that lowers Brent crude oil prices may help support the Indian currency.

More generally, the Indian economy is also consumer-oriented, unlike China and Japan’s reliance on exports. The data shows that the US is not a major destination for Indian manufactured exports. Services such as IT and business process outsourcing, which account for 75% of exports, are unlikely to suddenly become uncompetitive.

“The fundamentals of the economy are not changing — even as the U.S. enters recession,” Bernstein’s Garre said. “Therefore, a short-term correction … does not necessarily make the case for a larger impact, and we see limited risks of a US recession — if that happens.”

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

“Ultimately, India is likely to head for a primary balance, which supports a new high for corporate leverage, private investment and the share of profits in GDP,” Morgan Stanley equity analyst Ridham Desai said in a note to customers this month.

“The subsequent rally in equity prices will also be complemented by further growth in equity allocations on household balance sheets, significant global allocations to Indian equities (reflecting the increasing weighting of India’s index), a rise in corporate issuance and a new peak in equity valuations shares. “

However, not everyone supports the view that India could be used as a hedge if the US falls into recession.

“I wouldn’t say that India will disengage completely, but I think India is in a much better position to ride out the noise of volatility,” said John Ewart, portfolio manager behind Aubrey Capital’s $600 million Global Emerging Fund Markets. he told CNBC’s Inside India. More than half of Ewart’s capital is invested in India.

“The companies we look at are insulated from the short-term noise we see and read, which comes from speculation about what the next US Fed rate cut might be, and when or what happens to the Japanese yen.” Added Ewart. His fund’s top holdings are Varun Beverages – distributor of Pepsi, food delivery company Zomato and real estate developer Macrotech.

In fact, “the enemy is within” for Indian stocks, according to Bernstein’s Garre. A key risk for investors is high valuations for stocks in the current climate. Indian stocks continued to set all-time highs even after analysts cut profit expectations by 1 percent for nearly half of India’s 200 largest companies.

The strategist pointed out that despite the intense two-day sell-off, Indian stocks continue to have “rich valuations and a lack of earnings support.”

of India Nifty 50 now surpasses it S&P 500. As mentioned above, the benchmark is up 11.8% so far this year, outpacing the S&P 500’s 9% gain, and analysts told CNBC that the index could go even higher. Traders are increasingly expecting the US Federal Reserve to cut interest rates in September, and that environment could boost Indian stocks.

Indian stocks have fallen 2.4% this week along with their global peers. THE Nifty 50 The index remained above 24,000 after reaching 25,000 for the first time last week. The index rose by 11% this year.