Foreign investors may heat up Indian stock markets amid US stagflation risk

No one knows what shape such a stalemate playbook will take, but one thing is certain: it will involve some emerging market assets.

Stocks and bonds in poor countries have sank this year amid tight and runaway consumer prices by the Federal Reserve, and could sell even more if the global economy stalls. Still, it is in the pockets of emerging economies that anti-inflationary drugs exist: faster growth, accommodative policy and inflation-adjusted returns. It can unlock opportunities in everything Indian Equity For Brazilian currency and Chinese bonds.

“Inflation will force investors to look for pockets of growth in the world, and emerging markets will be first in line, particularly more immune to weak global demand,” said Trin Nguyen, a senior economist at Natixis SA. Huge growing domestic markets that not only shield their economies from a global recession, but also benefit from it, will do particularly well.”

The likelihood of a recession in the US has risen to 50% for only the second time since the 2008 financial crisis. Inflation in the world’s largest economy has shown signs of peaking, but is expected to remain well above the Fed’s target of 2% until at least 2024. In the UK and the rest of Europe, consumer prices are still rising, while an energy crisis makes economic contraction likely.

This is unfamiliar territory for a generation of traders. Since 1982, growth and inflation risks have gone hand-in-hand, while recessions reset economies with lower prices. But now, both the consumer-price index and growth are simultaneously deteriorating and calling for an entirely new trading paradigm.

The key themes of such a strategy according to money managers would be:

domestic growth hero

While the impasse in the US and Europe could stifle developing economies dependent on exports, it could benefit countries with a stronger domestic-consumer demand and less reliance on Western markets. This will benefit countries with domestically focused companies and India stands out in this respect. The country, which derives just 12% of its GDP from exports, is projected to grow the fastest among major economies in 2023. Its stock market is one of the few to post an advance this year.

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less globalization please

In general, nations that offer some sort of relative insulation from Western economies are likely to attract investment interest. This may take the form of less sensitivity to imported inflation, less need for foreign capital or monetary-policy divergence. Soo Trin, Head of Macro Strategy for Asia at ManuLife Investment Management, identified Indonesia, Malaysia and Vietnam as examples. Investors have already begun to favor dollar bonds from these countries, sending their sovereign-risk premiums to their lowest levels in seven, nine and two months, respectively.

“The economies most vulnerable to negative demand shocks are net food and energy exporters, less dependent on foreign capital and still having policy space.” Sue Trin said. “Economies capable of mitigating negative supply shocks have a relatively low weight for food and energy in their consumer-price index and import basket.”

Stimulus is not dead

A popular topic for global investors since the start of the year, China’s bias towards loose monetary policy could become even more compelling. Reversing factory-gate inflation, a slowdown in the property-sector and a fragile recovery beset by the outbreak of COVID-19 is committed to easing policymakers further. This makes the spread of Chinese sovereignty over treasuries closer to 200 basis points – compared to the historical average of 135 basis points – looking like a bargain.

“For some, though not all, emerging markets are likely to outperform if inflation hits developed countries,” said Eugenia Victorino, head of Asia strategy at SEB AB. “China, a key driver of emerging markets, will be unique in pursuing a supportive policy amid tight bias around the world.”

Large Yield Advantage

Brazil is an oasis in Latin America, a continent where the overall mood is one of gloom over growth inhibition brought on by persistent inflation and policy tightening. The country’s consumer-price growth collapsed in July, responding to one of the most aggressive hiking cycles in emerging markets. This leaves Brazil with a real yield of 3.68 percentage points, the highest inflation-adjusted rate among countries tracked by Bloomberg.

Given that stagflation can leave most countries with anemic real rates, Brazil’s produce is a potential attraction for traders to take over. China and Vietnam can also find their positive returns which can give them an edge.

But that by no means means that emerging markets are safe from the impasse in advanced economies. In effect, this would be a blow to the overall asset class, spurring portfolio outflows and sending investors to the safety of the dollar. It’s just that in that turmoil, the only place where investors can get some growth, some incentive, and some yield is the developing world.

Vishnu Varthan, head of economics and strategy at Mizuho Bank, said: “Emerging markets are unlikely to receive a fair global recession shock, but as far as inflationary slowdown risks are a spectrum, emerging market opportunities outweigh developed-market risks. Can help hedge.” ,

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