*******US Recession: How will a US recession play out for India, other emerging markets? – The Economic Times

Clipped from: https://economictimes.indiatimes.com/opinion/et-commentary/how-will-a-us-recession-play-out-for-india-other-emerging-markets/articleshow/92789413.cms

Synopsis

Since the peak in October 2021, the Indian market has been in correction mode, with over $40 billion in FPI selling. That’s 2.7 times the $15 billion sold during the GFC. The $29 billion in FPI selling this year (June alone saw $6.4 billion of selling) has been offset by $30.7 billion of domestic mutual fund buying.

Gautam Trivedi

Gautam Trivedi

Managing partner, Nepean Capital

In the US, inflation is currently real and in your face – from a cup of coffee and Uber rides to groceries and eating out. As are labour shortages. In April, 13,500 airline personnel quit the aviation industry. The shortage is so dire and the summer demand so strong that, last week, Delta Airlines was reportedly willing to pay $10,000 to any passenger willing to forgo her seat for a flight from Michigan to Minnesota. The housekeeper in my New York hotel who used to make $18 an hour now makes $30 an hour.

While most people in the US still work from home 2-3 days a week, life is returning to normal. Here’s the general view among a cross-section of US investors and financial intermediaries I met:

Inflation is the No. 1 issue. The first 125 basis points (bps) in rate hikes by the Fed seem to have had no impact on inflation.

In the private markets, down rounds have begun, and more are expected to follow. Hedge and crossover funds that took bets in private markets have been badly bruised. Stocks with low hedge fund concentration – year to date (YTD) -14% – did much better than those with high hedge fund concentration (YTD -24%).

Of the Brics countries, the interest in Brazil and China is tepid, and Russia is out of bounds. So, relatively, India does look better. But there’s no appetite now to invest in any emerging market (EM).

US funds have lost a lot of money in China, especially in tech. While most funds were disappointed with China, some did admit that valuations are starting to look attractive.

The one question that came up was: why are all EMs bundled together as one asset class? Issues impacting Mexico are not the same as those impacting India, and vice versa. But when global funds go risk-off on EMs, they unfortunately do not distinguish between a stronger and a weaker country.

Bite Into the Bitter Coating

So, where do we go from here? The S&P 500 has had the worst H1 performance since 1970, and the fourth worst on record. The 20% YTD fall has wiped out $8 trillion in value. Historically, though, when the S&P 500 has fallen 15% or more in the first six months of the year, it has risen an average of 24% in the second half. It would be optimistic to expect that this year.

Asia (ex-China) has seen over $111 billion of net foreign portfolio investor (FPI) selling since January 2021, surpassing the $93 billion of selling witnessed during the 2007-08 global financial crisis (GFC). The FPI selling has been, to a great extent, offset by retail buying in India, South Korea and Taiwan. YTD in 2022, these three markets have seen $51 billion of domestic buying, thereby absorbing much of the foreign selling. This year, India ranks No. 2, after Taiwan, in FPI selling.

Since the peak in October 2021, the Indian market has been in correction mode, with over $40 billion in FPI selling. That’s 2.7 times the $15 billion sold during the GFC. The $29 billion in FPI selling this year (June alone saw $6.4 billion of selling) has been offset by $30.7 billion of domestic mutual fund buying.

The US Fed is likely to do whatever it takes to clamp down on inflation. But its impact will be felt all over the world given that globally the dollar remains the reserve currency. EMs and India are collateral damage of the Fed’s interest-rate hikes. In fact, the euro has just hit a 20-year low against the strengthening dollar. Hence, in India, if the Reserve Bank of India (RBI) doesn’t keep step with the Fed in raising rates, the rupee will depreciate even faster than the 6.25% fall we have witnessed so far this year. This, in turn, will add to the already high imported inflation.

Higher interest rates in India have two major impacts:

Higher financing costs for corporates and retail alike.

Equities start to become less attractive as fixed income yields rise.

India remains the most expensive market in Asia, trading at CY2023 -to-earnings (P/E) 18.3 times, against 11.6 times for Asia (ex-Japan), 11 times for China and 15.8 times for the S&P 500. Having said that, India does have one of the highest earnings growth estimates for the next year at 14-15%, against an average of 10% for EMs.

They Stand Corrected

While the headline Nifty50 has fallen 10.5% in local currency terms (16% in dollar terms), individual stocks have fallen significantly more.

Of the BSE 500, 148 stocks have corrected 40% or more from their respective 52-week highs.

370 stocks have corrected 20% or more from their respective 52-week highs.

Hence, three-quarters of the BSE 500 stocks are in a bear market.

Hence, India has had a good correction.

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