The global economy significantly influences the Indian economy and its stock market, due to the interconnected nature of today's financial systems. Understanding these correlations—both positive and negative—can help investors make informed decisions and effectively diversify their portfolios. Here's a breakdown of how global economic changes can impact the Indian market, the factors to consider, and strategies for portfolio diversification.
Correlations with Other Markets and Economies
Positive Correlations:
US Economy:Â The US is one of India's largest trading partners. A strong US economy often leads to increased demand for Indian exports, which can boost the earnings of companies listed on the Indian stock market.
Foreign Institutional Investment (FII):Â When global investors have a favorable outlook towards emerging markets, there's a surge in FII into India. This increases liquidity in the stock market and can lead to higher stock prices.
Negative Correlations:
Global Crises:Â Events like the 2008 financial crisis or the 2020 coronavirus pandemic can lead to a sell-off in global markets, including India. Such crises often result in foreign investors pulling out funds, leading to a drop in stock prices.
Oil Prices:Â India is a major importer of oil. High global oil prices can increase the country's trade deficit and put pressure on inflation, negatively impacting the stock market.
Factors to Consider
Global Economic Indicators
Global economic indicators like the US unemployment rates, China's manufacturing output, and Europe's GDP growth are closely watched by investors worldwide. Positive data from these regions can boost investor confidence globally, leading to an increase in investment in emerging markets like India. Conversely, poor indicators can result in a global pullback from riskier assets, including Indian stocks.
For example, during periods of low unemployment in the US, consumer spending typically rises, benefiting Indian companies in sectors like IT and pharmaceuticals that have significant business dealings with the US. Conversely, if China's manufacturing output declines, it could signal a slowdown in global manufacturing, affecting Indian companies in the metals and materials sector due to reduced demand for exports.
Currency FluctuationsÂ
The exchange rate between the Indian Rupee (INR) and other major currencies affects the competitiveness of India's exports. A weaker INR makes Indian goods cheaper and more competitive on the global market, potentially boosting the earnings of export-oriented companies. However, companies that rely heavily on imported raw materials or have significant foreign debt can suffer as their costs increase.
When the INR depreciates against the USD, IT and pharmaceutical companies, which earn a substantial portion of their revenues in dollars, benefit from higher rupee revenues when these dollars are converted. However, airlines and oil companies, which have significant expenses in dollars, may face increased costs.
Interest Rate TrendsÂ
Interest rate decisions by central banks in developed economies (like the Federal Reserve in the US or the European Central Bank) have a broad impact. When rates are high or rising in these economies, investors may shift their capital to these safer assets, leading to capital outflows from emerging markets like India. This can put pressure on the Indian stock market and lead to depreciation of the INR.
If the US Federal Reserve increases interest rates, it could lead to a strengthening of the USD as investors seek higher returns in US assets. This can result in a reduction of foreign investment in Indian stocks, causing market volatility and potential declines.
Trade Policies
Tariffs and trade policies can disrupt global supply chains and affect countries' trade balances. For India, trade wars (like the US-China trade tensions) can have mixed effects. Some sectors may benefit from increased demand as global supply chains adjust, while others may suffer from tariffs and reduced exports.
The US-China trade war has sometimes benefited India, as companies look to diversify their manufacturing and sourcing away from China. Indian manufacturers in sectors like textiles and auto components have seen increased demand. However, sectors like electronics, which rely on imports from China, have faced disruptions and increased costs.
Diversifying Your Portfolio
To navigate and capitalize on the impacts of global economic changes, diversification is key. Here's how you can diversify your investment portfolio:
By Asset Class:Â Don't just invest in stocks; consider bonds, real estate, gold, and even cryptocurrencies to spread your risk.
Geographically:Â Invest in markets outside of India. International mutual funds or ETFs that track global indices can give you exposure to foreign economies.
Sectoral Diversification:Â Invest across different sectors such as technology, healthcare, energy, and consumer goods. This helps mitigate the risk if one sector underperforms due to global economic shifts.
Currency Diversification:Â Investing in assets or securities denominated in other currencies can hedge against currency risk.
Influence by Major Stock Markets
The major stock markets around the world, such as the New York Stock Exchange (NYSE), NASDAQ (United States), London Stock Exchange (LSE) (United Kingdom), Frankfurt Stock Exchange (Germany), and Shanghai Stock Exchange (China), can significantly influence movements in the Indian stock market due to globalization and the interconnectedness of financial markets. Here's an overview of how these markets can affect movements in India:
US Markets (NYSE and NASDAQ)
Direct Influence:Â The US markets are the largest in the world, and their performance often sets the tone for global investor sentiment. A strong performance in the US markets can lead to positive investor sentiment worldwide, including in India. Conversely, a downturn in the US markets can lead to a global risk-off mood, causing sell-offs in markets worldwide, including India.
Technology Sector:Â Given the significant weight of technology companies on both NASDAQ and the Indian markets, movements in US tech stocks can directly influence Indian tech stocks, especially those with business ties to the US.
Monetary Policy and Interest Rates:Â Decisions by the US Federal Reserve on interest rates and monetary policy can influence global capital flows. Higher interest rates in the US can attract capital away from emerging markets like India, leading to potential sell-offs.
European Markets (LSE, Frankfurt Stock Exchange)
Trade and Investment Flows:Â Europe is a significant trade partner for India. Positive economic indicators or stock market performances in Europe can lead to increased confidence in European investors' outlook on Indian markets, leading to increased investments.
Currency Movements:Â The performance of European markets can influence the Euro, which in turn can impact the Indian Rupee through trade and investment flows, affecting import-export businesses and foreign debt servicing.
Asian Markets (Shanghai Stock Exchange):
Regional Sentiment:Â Given the geographic proximity and trade relationships, strong performance in Chinese markets can lead to positive sentiment across Asia, including India. However, negative developments, such as economic slowdowns or trade tensions, can have the opposite effect.
Supply Chain:Â Many Indian companies are intertwined with Chinese supply chains. Disruptions or significant movements in Chinese markets can impact these supply chains, affecting the stock prices of Indian companies dependent on Chinese imports or exports.
Interconnectedness and Correlations
Global Liquidity:Â Liquidity in major markets, driven by monetary policies of central banks like the US Federal Reserve, European Central Bank, and People's Bank of China, influences global risk appetite and investment flows into emerging markets, including India.
Investor Behavior:Â Institutional investors often allocate investments across global markets. Their reactions to developments in one market can lead to correlated buying or selling in other markets, including India.
Global Economic Data and Events:Â Events like global economic crises, significant political events (e.g., Brexit), and international trade agreements or disputes can simultaneously impact all markets, including India, as investors adjust their risk exposures globally.
Major events in the last Two years
In the last two years, the Indian stock market has been significantly impacted by a series of global events, each influencing market movements and investor sentiment in distinct ways:
COVID-19 Pandemic: The emergence and global spread of COVID-19 in early 2020 led to one of the most significant crashes in the history of the Indian stock market. On March 23, 2020, the Nifty 50 index fell by 12.98%, marking a major event as the pandemic disrupted production and supply chains worldwide​.
US-China Trade War: This conflict led to global economic uncertainty, affecting investor confidence and contributing to volatility in the Indian stock market. Export-oriented sectors in India, such as IT and pharmaceuticals, faced challenges due to the slowdown in global trade​.
Russia-Ukraine Conflict:Â Starting on February 24, 2022, this conflict led to a surge in crude oil prices and exacerbated the global semiconductor shortage, given Russia's and Ukraine's roles in supplying key materials. The conflict spooked global markets and had a direct impact on the Indian stock market due to India's dependence on oil imports and the technology sector's need for semiconductors.
High Inflation and Interest Rate Hikes: With economies worldwide grappling with high inflation rates in 2022, central banks, including the Reserve Bank of India (RBI), began raising interest rates to curb inflation. This scenario increased borrowing costs, leading to lower growth projections and affecting market sentiments. NIFTY 50 fell by 9.07% in the first half of 2022 due to these challenges​.
Global Inflation and Monetary Policy Shifts:Â The aggressive monetary policy stance by the US Federal Reserve to combat inflation led to the strengthening of the US dollar. This, coupled with high global inflation rates following the Russia-Ukraine conflict, affected emerging markets like India. The Indian rupee ended 2022 as the worst-performing Asian currency, illustrating the significant impact of global monetary policies on India.
Europe's Energy Crisis:Â Europe's energy crisis, triggered by the Russia-Ukraine conflict and subsequent sanctions on Russia, led to a search for alternative fuel supplies and contributed to global inflation. The crisis had indirect effects on India, influencing global economic sentiment and energy prices.
FII Selling and Domestic Flows: The tighter monetary policy by global central banks led to foreign institutional investors (FIIs) withdrawing funds from emerging markets, including India, in favor of safer assets. However, domestic flows remained resilient, providing some support to the Indian equity market amidst global uncertainties​.
Market Outlook
The outlook for the Indian stock market in 2024 is broadly positive, with various forecasts suggesting continued growth based on the nation's robust economic fundamentals, despite global uncertainties. Here's a summary of what experts predict, along with their sector-wise analysis:
Market Growth Predictions:
Overall Growth: India's stock market is expected to hit new highs in 2024, driven by the country's sustained expansion as the fastest-growing major economy. A Reuters poll of equity strategists suggests the BSE Sensex index could rise over 10% by the end of 2024. The growth is anticipated to be broad-based across sectors, with value stocks expected to outperform growth stocks​.
Specific Predictions: Goldman Sachs forecasts the Nifty50 index to reach 21,800 by the end of 2024, expecting corporate profits in India to rise by 15% in 2024 and another 14% in 2025. Morgan Stanley predicts the BSE Sensex could hit 74,000 by December 2024, assuming continuity in government with a majority mandate, stable policy, robust domestic growth, and benign oil prices​.
Sector-wise Outlook:
Banking and Financial Services: This sector is expected to remain a focus throughout the year, benefiting from consumption growth at the beginning and towards the end of the year. Infrastructure and capital goods sectors are also expected to do well, depending on progress in capacity utilization and fresh capacity creation​.
Technology and AI: With rate cuts expected and a focus on developing the next level of technology and AI, the IT sector could be a smart long-term investment​ (mint)​.
Automobiles, Cement, Industrials, and Utilities: These sectors are also favored, with particular emphasis on banks, automobiles, cement, industrials, and utilities due to domestic growth​.
Factors Influencing the Market:
Economic Growth: India's GDP growth, leading among major economies, plays a crucial role in driving domestic equities. With improvements in credit availability, domestic companies, especially those driven by capital expenditure, are expected to show tremendous growth​.
Inflation and Political Stability:Â Moderate inflation and the outcome of the general elections in 2024 are key factors to watch. A stable government post-elections could further instill confidence among investors.
Despite the overall positive outlook, investors are advised to remain cautious and diversify their portfolios, considering the global economic environment and domestic factors such as inflation and political stability. With sectors like finance, technology, automotive, and infrastructure poised for growth, focusing on fundamentally solid stocks and maintaining a long-term investment perspective could help navigate potential market fluctuations.