How Indian stock market may benefit from sell-off in US equities

Lokeshwarri S K | Updated on October 03, 2019

FPI flows in to emerging markets such as India will increase once US stock market begins correcting

Indian equities have put up a resilient show so far this morning. Despite fears of a sharp decline on Thursday morning, due to the sharp fall in US stocks in the last two sessions, both the Sensex and Nifty are attempting to stabilize around 0.80 per cent lower than Wednesday’s close, after an initial blip that took them about 1 per cent lower.

Part of the reason for this good show could be the market’s expectation that the RBI will dole out a large rate cut on Friday. But it also needs to be noted that the US stock market has been one of the best performing so far this year. This has resulted in the global funds moving in to US stocks, as liquidity typically tends to chase better performing markets. If the US market begins correcting, it could result in money moving in to emerging markets including India.

US market begins declining

The trade war is finally beginning to take a toll on the last bastion still standing – the US market. The US-China trade war that began in 2018 has already impacted all emerging economies as well as stock markets. With the US training its guns on the Europe now with the proposal to impose tariffs of $7.5 billion on goods from the European Union, investors in US are now beginning to lose hope of a resolution to this issue any time soon.

Also read: Wall Street tumbles as trade war threatens US economy

Thus far, only manufacturing sector in the US had been impacted by the trade war, but concerns about consumption are also growing now. Quarterly sales reports of Ford and General Motors show that consumers may be cutting back on their spending. If consumption is hit and jobs market begins to decelerate again, US stocks may be difficult to hold on to the elevated levels at which they are trading currently.

US market hit

US stock indices have been quite resilient since the beginning of this year, with the Dow Jones Industrial just 3 per cent below its life-time peak recorded in July 2019. The Nasdaq Composite is perhaps the best performing index this year, with year-to-date gains of almost 19 per cent.

Even as MSCI India, MSCI EM and MSCI China indices are well below their 2018 peaks, the MSCI US index was close to a new high towards the end of September this year.

Global funds and liquidity

The stellar performance of US equities is due to the sustained demand from global funds. These funds have been flush with liquidity due to quantitative easing of central banks chasing US stocks. A lot of this money went in to US stocks due to a) the ‘home-country’ bias of investors and b) better performance of US equities compared to other global markets.

Also read: Asian stocks slide as US tariffs on EU fan growth worries

If stocks in US begin declining, foreign portfolio investors will once again begin considering investing in emerging markets with relatively better growth prospects. With the recent corporate rate cuts, which are likely to help the bottom-lines of many companies and the recent roll-back of enhanced surcharge on capital gains made by FPIs, the Centre is certainly trying to woo back these investors. Return of these investors could help boost sentiment towards Indian equity market.

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Published on October 03, 2019

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