If the United States enters a recession, would India be a good hedge?

After experiencing recent market turmoil, the Indian stock market surprisingly outperformed the US stock market.

Last week, the Bank of Japan unexpectedly raised interest rates, while the Federal Reserve hinted at a possible rate cut in September, causing global stock markets to be on edge. Following this, disappointing US non-farm payroll data led to a "Black Monday" for global stock markets this week. The Nikkei index plummeted by over 12%, the S&P 500 index fell by 3%, while the Indian Nifty 50 index only dropped by 2.7%.

Even more surprising is that the Indian Nifty 50 index has surged by 11.8% year-to-date, outperforming the 9% increase in the S&P 500 index. Some analysts believe that the Indian stock market may continue to rise in the future.

This has also sparked investors' thoughts: If the US economy really falls into recession, can India be another hedging option?

Bullish on India

Those bullish on the Indian economy believe that India has the potential to hedge against a US economic downturn.

Venugopal Garre, head of Bernstein's India research, pointed out that even if the US enters a recession, the fundamentals of the Indian economy will not change, so short-term fluctuations may not necessarily have long-term effects.

Despite the weakness in the European and American economies, the Indian economy is thriving. The differentiation of the global economy makes it unlikely that the macroeconomic difficulties in the US will trigger a global event by 2025, as previous banking crises in the US and Europe have shown that major impacts are often localized.

Historically, US economic recessions have typically led to capital flowing into safe-haven assets such as the US dollar, US bonds, and gold, while risk assets such as stocks and emerging market currencies have fallen.

Although the Indian rupee recently hit a historic low, the Reserve Bank of India maintaining the 6.5% interest rate, along with lower inflation and strong GDP growth, may help alleviate selling pressure on the rupee.

From a fundamental perspective, if a US economic recession leads to a decline in commodity prices, India, as a net energy importer, may also benefit from lower oil prices, thereby supporting the rupee.

After all, the Indian economy is primarily driven by consumption, unlike Japan, which is heavily reliant on exports. Data also shows that in India's exports, IT and business process outsourcing services account for 75%, making it unlikely to suddenly lose competitiveness due to a US recession.

Moreover, Morgan Stanley analyst Ridham Desai is optimistic about the Indian economy and stock market, believing that the Indian government's measures to reduce the budget deficit and control spending will drive stock market gains and increase the share of corporate borrowing and private investment in GDP.

Going forward, the further increase in Indian households' equity allocation, significant allocation of global investors to Indian stocks (reflecting the rise in the weight of the Indian index), and the increase in Indian corporate stock issuances will all support the rise of the Indian stock market.

Still Need to Be Cautious About the High Valuation Risks of the Indian Stock Market

However, not everyone agrees with the view that "India can serve as a hedge against a US economic recession."

John Ewart, fund manager at Aubrey Capital, mentioned that although India currently has certain advantages, it still cannot completely avoid market fluctuations. His fund holds shares in Indian beverage company Varun Beverages, food delivery platform Zomato, and real estate developer Macrotech In addition, Garre also reminded that a major risk facing investors is that in the current environment, Indian stock valuations are still too high. Despite experiencing earlier sell-offs, Indian stock market valuations remain high.

The high valuations and insufficient profits in the Indian stock market are still a major risk for investors. Even after analysts lowered profit expectations for nearly half of the top 200 companies in India by 1%, the Indian stock market continues to hit new historical highs