'If the US stagnates and falls into a recession, the dollar will weaken, oil prices will also dip. This augurs well for India.'
The risk of a 'waterfall decline' in the US stock market is rising, cautioned Christopher Wood, global head of equity strategy at Jefferies in his recent note to investors, GREED & fear.
The risk, he said, is not just high valuations but a panic unwind of passive investment where everybody owns the same stocks.
'Tariff hikes are plain bad news as the historic precedent of the Smoot-Hawley Tariff Act of 1930 highlights. This is an impoverishment day, not a liberation day,' Wood wrote.
Meanwhile, the Dow Jones ended 1,700 points lower in a single session earlier this week, and slipped into correction territory -- a fall of 10 per cent from its peak levels.
The S&P 500 slipped 5 per cent while the Nasdaq lost 6 per cent, losing over 1,000 points as US President Donald Trump's sweeping tariffs raised the possibility of the country slipping into a recession -- a period of decline in economic activity resulting in a fall in the country's gross domestic product (GDP) for two consecutive quarters.
US tariffs, according to analysts at Fitch Ratings, have reached levels that are transforming global economic outlook, significantly raising US recession risks and constraining the US Federal Reserve's ability to lower interest rates further.
US growth in 2025, they believe, is likely to be slower than their March 2025 projection of 1.7 per cent, given higher-than-anticipated tariffs.
'Tariff hikes will result in higher consumer prices and lower corporate profits in the US. Higher prices will squeeze real wages, weighing on consumer spending, while lower profits and policy uncertainty will act as a drag on business investment,' Fitch said.
Can Indian markets decouple?
Indian stock markets, however, relatively withstood the global market rout as the tariff proposals, analysts said, were somewhat factored in.
However, sectors impacted by Trump's tariffs, they caution, will continue to feel the heat as investors become risk averse and stay away from the impacted sectors.
At a broader level, Indian macros, they feel are on a firmer footing and should withstand negative surprises.
While the stock markets will not completely decouple from the global developments, domestic triggers in the form of corporate results and the guidance given by companies, how the summer season plays out and its impact on economic activity, progress of monsoon and its impact on inflation, central bank policies and the negotiation with the US regarding tariffs, they said, will be keenly watched.
"If the US stagnates and falls into a recession, the dollar will weaken, oil prices will also dip. This augurs well for India. This is a structural change and will correct global growth," G Chokkalingam, founder and head of research at Equinomics Research.
"There will be a flight of money from these stock markets to places that could see relatively better growth, and India will stand out here," Chokkalingam noted.
"Indian markets, therefore, could relatively outperform and become decoupled from the US markets," Chokkalingam added.
Jitendra Gohil, chief investment strategist at Kotak Alternate Asset Managers, advises investors to reduce portfolio beta and reallocate sectors towards domestic-focused names such as banking and financials.
Though they maintain a 20 per cent allocation to international markets, they have been advising cutting exposure to US markets and diversifying their international allocation.
"With the correction in the dollar index and falling Brent oil prices, India may experience near-term outperformance," Gohil said.
"Nevertheless, investors should lower return expectations and diversify their holdings."
Feature Presentation: Aslam Hunani/Rediff.com
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