India Equity Playbook 2024: US Pivot Has Finally Happened; Will D-St shine even brighter?

He US Federal Reserve has finally cut its interest by 50 bp. Our analysis shows that since the turn of the century, the United States has seen three instances of 50bp rate cuts, driven by the need to reduce a recession. Excluding COVID, US markets corrected 24% to 28% a year after the first cut. Indian markets also followed suit, correcting by 15-30% during these two instances.

However, this time the US GDP is still growing at around 2% and fears of recession are less. In theory, falling interest rates over the long term should revive demand, increase capital spending and reduce the cost of capital, and boost market valuations and earnings, especially if the economy is growing. In our eyes, India falls into this basket of “growing economies with stable drivers of corporate profits”. The increase in internal liquidity led to the belief that actions could be decoupled from the global and US markets, at least avoiding any significant decline.

The United States has finally turned a corner: could global markets correct themselves?

He fed has cut its interest rate by 50 basis points, to 5%, to stop the rise in unemployment rates and strengthen demand. This could lead other economies to follow suit, although not at the same pace. The expected cuts are another 150 basis points by the end of 2025. This could require a weakening of the US dollar, especially against India. Our analysis shows that since the turn of the century, the US has seen three instances of a 50bp rate cut PIVOT, before the current 50bp Fed cut on September 18, 2024. The drop The dot-com bubbles and 9/11 led to 2001 being a year of recession: after the dot-com bubble of the late 1990s and 2000s, came the dotcom crisis. 2001. The frenzy of irrational exuberance caused massive amounts of money to flow into increasingly unviable dotcom investments, leading to an inevitable stock market crash. The Nasdaq Composite peaked in February 2000, but did not bottom until September 2002. Along the way, the stock market crisis spread to the real economy, causing a modest GDP contraction in 2001 and higher levels of unemployment. This led to a recession that lasted eight months. The terrorist attacks of September 11 only exacerbated the economy’s problems. The first 50 basis point cut occurred in January 2001, and the Federal Reserve reduced interest rates by a total of 4.75 percentage points with a steady pace of rate cuts throughout 2001, with the last cut being of 25 basis points in December 2001.

During this period, the tech-heavy NASDAQ fell nearly 80% from its peak in October 2002, even 10 months after the last cut.

The housing market crash of 2007-2008 led to 2008 and 2009 being a period of recession.

The Federal Reserve completed its 2005-2006 campaign to raise rates in June 2006. By early 2007, the housing bubble was bursting and the unemployment rate began to rise. With the economy ailing, the FOMC began cutting rates in September 2007, eventually cutting them by 2.75 percentage points in less than a year. “The significant easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help promote moderate growth over time and mitigate risks to economic activity,” the Federal Reserve said in a statement from April 2008. After the April 2008 rate cut, then-Federal Reserve Chairman Ben Bernanke paused to assess the impact of lower interest rates on the economy. Some analysts believed that higher inflation was coming, and few realized how serious the coming global financial crisis would be.

The first 50 basis point cut occurred in September 2007, and the Federal Reserve reduced interest rates by a total of 4.75 percentage points over two cycles, with a steady pace of rate cuts through April 2008 of 25 basic points. The second cycle began again in October 2008 with cuts of 50 bp.

Although the US markets (S&P 500) were stable for the first 90 days, thereafter they began to fall and corrected by 24% in one year.

The 2020 COVID pandemic caused a short-lived recession in the first half of 2020.

Since COVID was a black swan, it was handled well by most governments, increasing fiscal deficits and cutting interest rates. Interest rates were aggressively cut by 50 bps and 100 bps in the first half of 2020 and therefore also by 10% of fiscal spending for the entire year. During this period in the first quarter the markets corrected almost 20% but reversed 50% of their fall in 3 months. The recession was also short-lived, lasting two quarters.

What we learned about the Fed’s 3 PIVOTS of 50 bps is due to the GDP contraction/recession and therefore the markets reacted negatively.

The Federal Reserve’s current 50 basis point cut is intended to curb unemployment rates and jobless claims and indirectly reduce the high interest burden on debt. US GDPH growth in Q2 2024 was 3% and was not a contraction, so the last three analyzes may not be valid regarding the possibility of a significant market correction.

Will Indian stocks become decoupled from the US and the world?

India, on the other hand, is seeing growth in its GDP estimates of ~7%, strong PMI expansion in both services and manufacturing; as well as a growing Forex reserve that currently stands at $690 billion. This is clearly a contrast to what prevails in the rest of the world, making it a safer haven for its global peers; However, index valuations are 10% above their five-year averages, 100% above emerging markets, and 25% above global comparisons.

What drives the stock markets are resilient domestic and FII flows. Post-election, both nationals and FIIs have invested more than $13 billion each in the market. Domestic flows have crossed ~US$25 billion in the fiscal year, the fourth highest India has witnessed in an entire year. Overall FII ownership levels in the Indian market are around 16.3%, the lowest level in 12 years, and we expect this to improve substantially going forward. Domestic financial institutions have Rs 1.9 lakh crore or 6.4% of their assets under management in cash and this will further cushion any major decline. The themes we would like to see invested in in the current environment are largely domestic-oriented rather than global-oriented sectors, especially as we have strong economic tailwinds and global headwinds to a slowdown in growth. In the global sector, we would like to invest in Indian outsourcing stories.