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The BSE Sensex surged 800 points (at noon) nearly scaling 80,000, shrugging away all global macroeconomic concerns that caused a 2000-point rout just on Monday. It is now effortlessly claiming lost ground underscoring the resilience of Indian equities compared to most global markets.

The obvious question is: Have Indian equities decoupled from global markets- emerging and developed? Is the Indian economy insulated from economic adversities in the US or other developed markets such as Europe or Japan? This Monday’s rout was a part of global equity indices meltdown, which was the fallout of bearish economic data in US and the unwinding of Japan’s Yen carry trade.

Analysts are extrapolating learnings from past developments and the impact of global developments on the Indian economy. An interesting report by Sanford Bernstein points out that India’s economy has “performed independently of the US whether be it during the dot-com phase, the mid-2000s before the GFC or even the 2018-20 phase.” Explaining this, the report says that from late 2000 to 2002, as the US slowed, India actually gained pace. The same happened during the mid-2000s until the Global Financial Crisis, with the reverse from 2018 till 2020 when the US kept up its 3 per cent pace, while India slowed down sharply.

Besides, with consensus pointing to the US Federal Reserve cutting interest rates in September, concerns of a hard landing that could send shock waves across some economies, have waned. Even if there is a small slowdown in growth rate, analysts feel that once rates are cut, the US will be quick to bounce back. Even a shallow recession in the US could moderate international commodity and crude prices that are favourable for India.

The real threat for India Inc. or markets is in its own economy as it walks a tight rope to balance inflation and growth. My colleague Aparna Iyer analysing the recent Reserve Bank of India survey of household inflation expectation and consumer sentiment writes that Indian households see higher inflation but not promising growth prospects. The survey also indicated that consumers are willing to spend on essentials in the near-term but not on non-essentials.

Indeed, this time round, the equities’ fall was also stoked by unwinding of the Japanese Yen carry trade. Ananya Roy, in this article-What’s behind the recent stock market correction? The answer lies in Japan, explains the meltdown in equities witnessed early this week. With Japan raising rates, the Yen carry trade becomes unviable leading to traders unwinding their positions in foreign markets, including the US and India. However, such market-linked phenomena are likely to last until the unwinding continues.

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The bigger concern that investors must ponder over is that Indian equities are trading at most expensive valuations, on a 12-month forward price-to-earnings ratio (compared to Asian peers). “The challenge India sees is internal rather than external: Eroding earnings support….”states the Bernstein report detailing that there are significant downgrades in earnings.

In today’s edition, the Chart of the Day carries two charts ( data from Motilal Oswal Financial Services) that portray a moderation in both revenue and earnings growth in the two years ahead. This could take the wind off the sails of equity valuations, which in turn, may prune the rise in Indian equities.

Investing Insights from our research team 

Bharat Forge Q1 FY25: Defence is gearing up for a powerful strike

Pidilite Q1: Should you stick to this adhesive stock?

Saregama: Muted quarter, music OTT transition to drive value over the medium term

Weekly Tactical Pick: Why this defence electronics stock is a good bet

India Shelter Finance: Lower opex and funding cost to support RoA

Eicher numbers continue to impress, new products to help

Lemon Tree Hotels: Major renovations to boost long-term outlook

PI Industries: Strong Q1FY25, but growth momentum slows

What else are we reading?

Decoding Economics: A 2019 IMF paper predicted how the yen carry trade would unwind

Bangladesh’s much-vaunted economic success was built on sand

RBI has a case to rethink on the proposed liquidity norms on tech-enabled retail deposits

Indians share RBI’s worry on inflation but not its enthusiasm on growth

It’s time to impose some actual standards for customer service

What's behind the recent stock market correction? The answer lies in Japan

Personal Finance: Don’t conflate Asset Allocation with Diversification

GenAI, rather than the Anti-Trust verdict, may be the bigger threat to Google

Chart of the Day: Revenue, earnings growth set to moderate in FY2025

What burger flipping tells you about the US economy (republished from the FT)

Nifty 50 hits record highs but is the market overvalued?

Vinesh Phogat's disqualification brings to fore the less talked about problem of weight category switch

My recession rule was meant to be broken

A golden opportunity beckons

With growth robust, RBI will hold its stance till disinflation is satisfactory

Personal Finance

Will limit on overseas investments by MFs be enhanced, now that RBI Guv is happy with forex reserves?

Technical Picks: Cochin Shipyard, Max Financial Services, Voltas andAurobindo Pharma (These are published every trading day before markets open and can be read on the app). 

Vatsala Kamat
Moneycontrol Pro