Equity investment | Global economy: What will happen to your equity investments if the global economy is heading for a downturn?

A recession is coming. The European Central Bank’s (ECB) unprecedented rate hike of 75 basis points, with further hikes on the horizon, is a sign that Europe should prepare for a long and painful winter ahead.

With the US market in the doldrums and the European market facing runaway inflation, there seems to be little to no respite for global markets experiencing one misfortune after another. Stimulus packages announced by several Western countries in response to Covid have now significantly increased their respective debts.

The effects of Covid-19, the crude oil spike, supply issues, chip shortages, the Russian-Ukrainian war, etc., have all caused disruption on a colossal level that seems to be derailing the global market. Heat waves across the world threaten to impact agricultural production as well as nuclear and hydroelectric operations. In addition, Russia recently pressured Europe by saying it would stop natural gas exports and ban Ukraine from exporting grain.

Despite several statements from global central banks attempting to appease the public, inflation has never been transitory. We are seeing continued increases in interest rates, leading us to believe that inflation is more persistent. China, the engine of global growth and global consumer of nearly 72% of iron ore production, 55% of refined copper and others, has slowed significantly, which has had a significant impact on the global economy.

Even to this day, many Chinese provinces are in lockdown. All of these factors have confused people wondering if the global economy is on the verge of collapse. Currency depreciation in many countries has also increased the import bill. You’re not alone if you’re wondering what will happen to your equity investments. That’s a good question to ask.

India’s inflation versus the world
A PMI level above 50 indicates an expanding economy, below 50 indicates that the economy is contracting. 50 is the determining line that decides the feelings of consumers. Take, for example, the composite PMI for the US at 44.6 and the UK at 44.6. Japan is at 49.4, while China is at 51.7, continuing to fall. There is a high probability that China’s composite PMI could fall further below 50.

The only silver lining is India’s composite PMI which sits at 58.2 and rising. Moreover, India is the only country among major economies where inflation is stable with a downward bias. 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 global economies may be subject to further rate hikes on an ongoing basis. Additionally, there is a 75% chance that the US Fed will announce another 75 basis point rate hike, which could further exacerbate the global economy. Additionally, some experts believe it would create more pressure on emerging market currencies.

So while neighboring countries such as Pakistan, Bangladesh and Sri Lanka are going through difficult times, the IMF’s projection that India’s GDP will reach 6.1% is the highest in the world among the greater savings.

We think China’s GDP could grow by less than 4%, and any forecast would otherwise be very optimistic.

No sadness or unhappiness, yet
Contrary to apocalypse advocates, we don’t believe the global economy is headed for collapse. On the contrary, we believe that the pain is likely to linger, especially for countries that do not take corrective action to rectify their policies or reforms.

Some European countries have offered subsidies to reduce the burden of fuel and electricity costs, but this only adds to their deficits. How to balance their income without raising taxes will be difficult. Things may get tough, but we believe the global economy is not headed for collapse.

As for India, we are unlikely to experience the pain that the world will experience. Moody’s Investor Service kept India’s sovereign credit rating with a stable outlook and said India’s recovery would not be derailed despite the Russian-Ukrainian military conflict, global inflation or even tighter security policies. countries like the United States.

But we believe the situation is very dynamic and we need to watch global developments with a keen eye. While the state of the global economy might affect India to some degree, it would have a limited impact.

This is where the Indian government has been very proactive. Whether it’s steel, wheat or sugar policies. The government moved quickly to ensure that the domestic consumption story did not suffer. Their preemptive actions testify to India’s inflation traction steadily declining for three consecutive months.

The government has additional plans to roll out reforms such as production-linked incentive schemes to ensure that Atma Nirman Bharat is a game-changer.

Indian stock market: an outlier
While the first half of 2022 has been tough for Indian equity investors, the second half has started to deliver returns. Dow and Nasdaq dip steadily, but the Indian market is in the green.

India would continue to be an oddity in terms of stock market performance. Global economies will struggle, but India will see gains. We have seen FIIs come back to India and have the opportunity to generate alpha. The shift will take place from West to East, where India will be a major player.

The equity market is a leading indicator, not a lag indicator, clearly showing that India will rise. So now is the time to get ready to take advantage of the rise in the Indian stock market, bet on India and stay invested in Indian stocks.

(Sunil Damania is Chief Investment Officer at MarketsMojo.)

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