The recent global sell-off has had a significant impact on various stock markets around the world. Japan’s Nikkei 225 index dropped by over 1/4th from its July peak to its August low, leading to corrections in nearby markets such as Taiwan and South Korea. In the US, the S&P 500 and Nasdaq also saw declines. However, the Indian stock market displayed strong resilience during this period, with the Nifty50 correcting by only 0.5/10th, outperforming the global markets.
The sell-off in Japan was triggered by the reversal of the „carry trade,“ a global financial strategy where investors borrow in yen and invest in higher-risk assets. The increase in yen interest rates and currency value posed challenges for carry trades, impacting the Japanese stock market and other markets with cross-country positions.
Additional factors contributing to the market decline include weak economic data in the US and waning enthusiasm for Artificial Intelligence (AI). Concerns about a potential slowdown in the US economy and high valuations of AI-based companies have also played a role in the market plunge.
India, however, was largely insulated from the effects of the cross-country carry trade. The decoupling of the domestic economy and the stability of the Indian Rupee helped shield the Indian stock market. Strong domestic demand, the China Plus policy, and substantial inflows from domestic investors have also supported the Indian market.
In the long term, India’s economy is projected to grow rapidly at a real rate of 7% in CY2025, while other economies face potential slowdowns. The moderation in crude oil prices and the influx of FII into domestic bonds are supporting the INR and forex positions, giving India a short-term advantage.
Despite these advantages, India remains susceptible to global market fluctuations. The correlation between the Indian economy and stock market has increased over the years. As global uncertainty, geopolitical risks, and high valuations prevail, domestic investors are becoming more cautious and shifting their positions from growth stocks to value stocks.
Pharma, FMCG, and IT sectors have been the top performers in the last month, reflecting this shift in investor sentiment. The weak Q1 earnings report suggests a slowdown in earnings growth, which may impact further upside in valuations. The risk of a sell-on-rally strategy is increasing as global market weakness persists.
In conclusion, while India has shown resilience in the face of global market fluctuations, it remains vulnerable to external factors. Domestic investors‘ contrarian buying and the strength of the Indian economy provide some insulation, but caution is advised as uncertainties continue to loom over the global market.