Could India serve as a safeguard against a potential U.S. economic downturn?

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The big story

The global stock markets were on the brink due to the surprise interest rate hike from the Bank of Japan and the Federal Reserve's consideration of a September rate cut.

The disappointing U.S. employment report caused stocks to plummet and ruined the celebration for investors.

On Monday, global stock markets experienced their most significant decline in over two years. Despite this, Japan's Nikkei plummeted by more than 12%, while the S&P 500 fell 3%. However, India's Nifty 50 only lost 2.7%.

The S&P 500 has been outperformed by the Indian benchmark of emerging market stocks year-to-date.

Could the market moves indicate how Indian equities may perform in the future if the U.S. experiences a recession?

Assessing the current global economic climate could provide insight into the answer. Despite challenges in Europe and a slowdown in China, India's economy is thriving.

Venugopal Garre, head of India research at Bernstein, stated that a macroeconomic distress in the U.S. is unlikely to become a global event in 2025 due to the disconnected global economic picture. Evidence of significant shocks being localized rather than spreading worldwide includes bank failures in the U.S. and Europe in 2023 and China's multi-year housing slump.

The Reserve Bank of India's decision to hold interest rates at 6.5% despite lower inflation and strong GDP growth may help ease the severity of a rupee sell-off, according to Garre.

If Brent crude oil prices fall due to a U.S. recession, the rupee may partially benefit. As a net energy importer, India is highly sensitive to changes in crude oil prices.

Unlike China and Japan, India's economy is driven by consumers rather than exports. According to data, the U.S. is not a significant market for Indian manufactured exports. Services, which account for 75% of exports, are unlikely to become uncompetitive quickly.

"According to Bernstein's Garre, the fundamentals of the economy remain unchanged even during a recession in the U.S. Therefore, a short-term correction does not necessarily lead to a prolonged downturn, and the risks from a U.S. recession are limited if it occurs."

The Indian government, following Prime Minister Narendra Modi's defeat in the general election, has implemented measures to stabilize the economy. The reduction in the budget deficit forecast and the imposition of self-imposed spending limits have been met with approval from investors, who believe these measures could boost stock prices.

Ridham Desai, Morgan Stanley's equity strategist, predicts that India will eventually achieve primary balance, leading to an increase in corporate leverage, private investments, and the share of profits in GDP, according to a note he sent to clients this month.

"The increase in share prices will be supported by an increase in equity allocation on household balance sheets, global allocations to Indian stocks, a rise in corporate issuances, and a new peak in equity valuations."

Not all individuals believe that India can serve as a hedge if the U.S. experiences a recession.

John Ewart, portfolio manager of Aubrey Capital's $600 million Global Emerging Markets fund, believes that India is in a better position to weather market volatility, although he doesn't think it will be completely detached. More than half of his fund is invested in India.

Ewart stated that his fund's top holdings include Varun Beverages, a Pepsi distributor, Zomato, a food delivery company, and Macrotech, a real-estate developer. He explained that these companies are shielded from short-term market fluctuations, such as speculation about the next U.S. Fed rate cut and the Japanese yen's performance.

Despite a two-day intense sell-off, Indian equities still have "high valuations and insufficient earnings support."

Need to know

The Nifty 50 of India is currently outperforming the S&P 500, with a 11.8% increase this year compared to the S&P 500's 9% gain. Analysts predict that the index may continue to rise, and traders anticipate that the U.S. Federal Reserve may cut interest rates in September, which could positively impact Indian stocks.

The Reserve Bank of India has instructed some large banks to cease their existing positions against the rupee in an effort to bolster the currency, according to Reuters. Officials from the RBI's financial markets regulation and operations department communicated with the firms on Tuesday when the rupee was at risk of falling below 84 against the dollar in the spot market, Reuters reported.

IndiGo's new booking feature that allows women to avoid booking a seat next to men on flights has been met with approval from many users on social media platforms X and Reddit. Some commentators praised the airline's initiative as "such good news" after having negative experiences while traveling alone.

India is predicted to experience the most rapid growth in ultra-wealthy individuals. Over the next few years, the number of ultra-high net worth individuals in India is expected to increase by 50%, according to consultancy Knight Frank. Mumbai, India's financial center, surpassed Beijing as Asia's leading billionaire hub earlier this year. Additionally, Mumbai ranks third globally on billionaire count, following New York and London.

What happened in the markets?

This week, Indian stocks have dropped 2.4%, mirroring the decline of global peers. Despite hitting a record high of 25,000 points last week, the index has remained above 24,000 points. The index has experienced a 11% increase in value this year.

The Indian government bond yield has decreased to 6.87%, in line with global bond market trends.

Tata Power CEO Praveer Sinha stated on Biz Focus Hub that the company is on track to achieve its 2045 target of net-zero energy production. Currently, more than 40% of the company's energy generation comes from renewable sources, and this is expected to increase to 70% by 2030. Sinha said, "We are very much on track, and you will only see that the speed gets enhanced with some of the new hydro projects we have identified for ourselves."

Max Healthcare's chairman and managing director, Abhay Soi, stated that he does not foresee any reason for growth to slow down. He mentioned that the company has experienced an 18% growth rate in the past three months, including the acquisition of two new hospitals and the commissioning of a new hospital.

What's happening next week?

Next week, Brainbees Solutions and Unicommerce eSolutions will list their shares on the stock market.

August 12: India industrial output

August 13: U.K. unemployment

The UK's inflation rate, India's wholesale inflation, the Eurozone's GDP, and the US's inflation rate are all important economic indicators.

August 15: India Independence Day bank holiday, Japan GDP, U.K. GDP