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Economic Downshift
Global markets brace for short-term swings, with long-term gains still on the horizon for savvy investors.
A Quick Snapshot
Market | Impact |
|---|
Global Stock Markets | Rallies are short-lived, with recession fears leading to cautious behavior from investors. |
US Treasury Yields | The yield spread suggests a recession is likely within the next 12 months. |
Inflation & Fed Policy | Lower inflation points to a small rate cut, but strong retail sales and housing prices limit more aggressive cuts. |
Commodities | Oil prices and the commodity index have fallen sharply due to US and China demand concerns. |
Indian Stock Market | Nifty 50 remains stable within a narrow range; major price gains are expected by 2025. |
The Deep Dive
Over the past six weeks, US recession fears have dominated global markets, causing rallies to be short-lived as investors adopt a 'sell on rise' strategy. This trend mirrors behavior seen in 2022 and early 2023 amid uncertainty about a potential soft landing. While official GDP data confirming a recession may not appear until early 2025, markets are likely to face downside risks for the rest of the year, especially with upcoming US elections.
The yield spread between 10-year and 2-year treasury yields, a reliable recession indicator, recently turned positive after two years of being negative. Historically, this shift has preceded recessions within 12 months, making it difficult for the US to avoid an economic downturn.
Inflation has eased to 2.5% YoY in August, its lowest level since February 2021, signaling a possible 25 basis point rate cut at the September 18 meeting. However, strong retail sales and persistent housing inflation suggest larger cuts are off the table for now. Markets have already factored in these developments, limiting upside potential but reducing downside risk.
Commodity markets haven't responded favorably to the prospect of rate cuts. The S&P GSCI Commodity Index is down 15%, and crude oil prices have dropped from $80 to $68 per barrel in just two weeks due to concerns about both the US recession and weak Chinese demand.
India Market
In India, the Nifty 50 has seen range-bound movement between 24,500 and 25,500. Valuations are in line with historical averages, and while we forecast a 30% appreciation in the Nifty by the end of 2025, substantial gains are not expected until 2025 when EPS growth and lower bond yields drive the next phase of price appreciation.
Investor Takeout
With the likelihood of short-term corrections in the next 2-4 months due to US recession fears and political uncertainty, investors should maintain a balanced approach.
A recommended strategy is to allocate 50% of the portfolio to Dynamicfactors and the remaining 50% to defensive and moderate strategies like Dividend Titans, Wealth Defenders, and Contra stories. Despite the near-term caution, the long-term outlook remains bullish, especially with anticipated gains in the Nifty 50 by the end of 2025.
Talking Money with Elever
Our newly launched video podcast series, Talking Money with Elever, brings you fornightly insight from the world of economy, business and investing. Hosted by our Co-founder & CMO, Santosh Ramakrishnan, it features as our resident domain expert, Karan Aggarwal, our Co-founder & CIO. Subscribe to EleverAlpha to follow the fascinating discussions every 15 days.
Our first episode featured the ever popular and slightly polarising subject of Passive Income - what works, what doesn’t, how to go about it, and so on. Below are the links for the entire video and some interesting clips from them.
Our upcoming episode on Monday, Sep 16, features a topic that’s more than just an asset class - Real Estate. We dive deep into the current scenario of the real estate market, dabble with the contentious issue of the scrapping of the indexation benefit in the recent budget, and touch upon the idea of fractional real estate.
