India newsletter: Could India be a hedge for a U.S. recession?

▪️ The big story

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

➖Then came a disappointing U.S. employment report that ultimately pushed stocks off their cliff and spoilt the party for investors.

➖Global stock markets fell the most on Monday in over two years. Japan’s Nikkei cratered by more than 12% and the S&P 500 fell 3% — yet India’s Nifty 50 only lost 2.7%.

➖The Indian benchmark (of emerging market stocks) has also started to outperform the S&P 500 year-to-date.

➖Could these market moves foretell how Indian equities might perform in the future if the U.S. does indeed fall into a recession?

➖ Taking stock of current economic conditions worldwide could partly address that question. While Europe is struggling and China is slowing down, India is booming.

➖Such a disconnected global economic picture means “it is unlikely that a macroeconomic distress in the U.S. becomes a global event in 2025,” Venugopal Garre, head of India research at Bernstein, told clients this week. Bank failures in the U.S. and Europe in 2023 and China’s multi-year housing slump provide evidence of the impact of significant shocks being localized rather than allowed to spread worldwide.

➖Historically, a U.S.-led recession typically leads to fund flows into safe-haven assets, such as U.S. dollars, Treasurys and gold. In contrast, risk assets like stocks and emerging market currencies fall. A depreciating Indian rupee, which hit an all-time low this week against the greenback, would dent total returns in U.S. dollars, euros or sterling, as the case may be for foreign investors.

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