Equity Investment | Global Economy: What will happen to your equity investments if global economy heads for a slowdown?

A recession is imminent. The European Central Bank’s (ECB) unprecedented 75 basis point rate hike, with more rate hikes on the horizon, is a sign that Europe is preparing for a long and painful winter.

With the US market in the doldrums and the European market facing rising inflation, there appears to be little to no respite for global markets as they experience one calamity after another. The stimulus packages announced by several western nations in response to Covid have now significantly increased their respective debts.

Covid-19 effects, crude oil surge, supply issues, chip shortages, Russia-Ukraine war, etc. have all created disruptions at colossal levels that appear to be derailing the global market. Heatwaves around the world threaten to affect agricultural production, nuclear and hydropower operations. In addition, Russia recently pressured Europe by saying it would halt natural gas exports and ban Ukraine from grain exports.

Despite statements from several global central banks trying to placate the public, inflation has never been temporary. We’ve seen steady rate hikes leading us to believe inflation is more resilient. China, the world’s growth engine and a global consumer of nearly 72 percent of iron ore production, 55 percent of refined copper and the like, has slowed drastically, significantly affecting the global economy.

To date, many provinces in China are locked down. All of these factors have people worried and wondering if the global economy is on the brink of collapse. Currency devaluation in many countries has also increased import bills. You are not alone if you are wondering what will happen to your investments. It’s a fair question.

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India’s Inflation vs World
A PMI reading above 50 indicates an expanding economy, below 50 is an indication that the economy is contracting. 50 is the defining line that decides consumer sentiment. Take for example the US composite PMI at 44.6 and the UK at 44.6. Japan is at 49.4 while China is at 51.7 and continues to decline. There is a high possibility that China’s composite PMI could fall further below 50.

The only bright spot is India’s composite PMI, which comes in at 58.2 and rising. In addition, India is the only country among major economies where inflation is stable and pointing downwards. India has a rare combination in the world where GDP growth would be high and inflation under control.

The RBI may announce its latest rate hike, but the global economy could be subject to ongoing rate hikes. In addition, there is a 75 percent chance that the US Federal Reserve will announce another 75 basis point rate hike, which could further tighten the global economy. In addition, some experts believe that this would create more pressure on emerging market currencies.

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So while neighboring countries like Pakistan, Bangladesh and Sri Lanka are going through tough times, the IMF’s forecast that India’s GDP would rise to 6.1 percent is the highest in the world among the world’s largest economies.

We believe China’s GDP could grow less than 4 percent and all other forecasts would be very optimistic.

No darkness or doom yet
Unlike doomsday advocates, we do not believe that the global economy is headed for collapse. Rather, we believe the pain is likely to continue, particularly for those countries that are not taking corrective action to correct their policies or reforms.

Some European nations have offered subsidies to reduce the burden of fuel and energy costs, but that only adds to their deficits. How they balance their earnings without raising taxes will be a challenge. It may be difficult, but we believe the global economy is not headed for collapse.

As for India, we probably won’t experience the pain that the world will experience. Moody’s Investor Service kept India’s credit rating on a stable outlook, stating that India’s recovery will not be derailed despite the Russian-Ukrainian military conflict, global inflation or even policy tightening by countries like the US.

But we believe that the situation is very dynamic and we need to keep a close eye on global developments. While the state of the world economy could affect India to some extent, the impact would be limited.

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Here the Indian government has been very proactive. Be it steel, wheat or sugar policy. The government reacted quickly to ensure domestic consumption did not suffer. Their pre-emptive measures are evidence of the steady decline in India’s inflation traction for three consecutive months.

The government has additional plans to introduce reforms such as the Production Linked Incentive programs to ensure Atma Nirman Bharat becomes a game changer.

Indian Stock Market: An Outlier
While the first half of 2022 has been challenging for Indian equity investors, the second half has started to yield returns. Dow and Nasdaq are steadily falling but the Indian market is in the green.

India would continue to be an oddity in terms of stock market performance. Global economies will face pain, but India will see gains. We’ve seen FIIs return to India to generate alpha. The shift will be from the west to the east, where India will play a prominent role.

The stock market is a leading indicator, not a lagging indicator, which clearly shows that India will rise. So now is the time to get ready to enjoy the upside potential of the Indian equity market, bet on India and stay invested in Indian equities.

(Sunil Damania is Chief Investment Officer at MarketsMojo.)

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