A note from the founder - Nov 22

There is a serious probability of a recession in the USA. We know that in the Covid years of 2020 and 2021, USA printed US 5.2 Trillion dollars in economic relief. Now, it is payback time in form of high inflation. As a result of persistent high inflation, also exacerbated by the Ukraine war and the consequent energy and food crisis, the US Fed started increasing the interest rates in the US economy since Mar22. It is the nature of markets to fall when the interest rates rise as there are opportunities to purchase bonds at attractive rates. At the same time, increased interest-rate leads to a decrease in money supply in the economy and markets. This leads to a possibility of recession or a slowdown of the economy. We have been speculating on the possibility of a US recession for a few months. The US economy has been growing last few quarters even though at an anemic rate of 1-2%. However, recent news of late Oct is that the short term rate is now higher than long-term rates. This is one of the signs that investors believe -that the long-term future is more uncertain and pessimistic than short-term. This signal has been often interpreted in the past as heralding an economic recession. We also believe that this may be indeed the case.

What are the consequences and implications of US recession on world economy, especially India? US being the largest economy in the world obviously affects the rest of the world. We already know that the UK and Europe are looking at prospects of a recession. This will have a negative impact on Indian growth rate. However, India is a strong domestic economy and will still continue to grow. In fact, it may be one of the faster growing economies in the world with ~6.5% growth rate in FY23. Yet, this is a consolation prize because what is the world considers high growth (~ 5% GDP growth) is not enough for India to grow at. We still have a huge population below poverty line and only high growth rates (>7%) can ensure that people come out of poverty fast. Therefore, the negative impact on Indian economy is that we will not be able to touch 7% or above growth.

Please note that the real economy and stock market are not always co-related. We have written about this in the past that the stock market is nothing but a market of stocks, of companies. What it means is that as long as the profits of large companies grow, you may see stock market index still going up and growing. In India there are several sectors that are now in growth trajectory thanks to the post-covid growth with demand coming back. The Ukraine war has caused commodity inflation leading to a squeeze on profit margins of companies yet based on the results of the two quarters FY22-23 gone by, we see that organised sector continues to grow its net profit. Hence, our long-term prospect of Indian stock market growth remains intact. A US recession and global slowdown may reduce the bullishness in the markets and may reduce the returns overall but still we expect Indian stock markets to grow at rates which are 10 to 12% range. In India too there is high inflation, and the RBI is trying to control it with increased interest rates. Therefore, there is opportunity to buy long-term bonds at attractive rates. GOI bonds are available at 7.3%. This augurs well for middle-class investors because for the last five years we didn't have this kind of rates available to us.

Overall, this is the time to be nimble, flexible and review/re-balance our portfolio. Let us book profits where we see possible downsides. Let us invest in good quality bonds for long-term yields. Please do have a conversation regarding this with your CFP.