Global stock market crash: Is US recession fear for real? What should Indian stock market investors do?

Markets globally saw a bloodbath on Monday, August 5. However, some signs of recovery emerged on Tuesday, August 6, amid hopes that central banks will act promptly to cut rates to support the economy and market sentiment. 

Key indices in the US—the Nasdaq, the S&P 500, and the Dow Jones—and major European markets, including the UK's FTSE, France's CAC 40, and Germany's DAX—suffered massive losses on August 5 on mounting fears that the US was staring at a recession and that the Fed had to cut rates swiftly to support growth.

Nasdaq, S&P 500 and Dow Jones fell 3 per cent, while FTSE, DAX and CAC 40 dropped up to 2 per cent. 

However, Asian markets saw a recovery on Tuesday, August 6.  Japan's Nikkei, which suffered a massive loss of 14 per cent, witnessing its worst one-day loss since "Black Monday" of 1987, in the previous session, jumped 9 per cent on August 6.

Indian stock market benchmarks—the Sensex and the Nifty 50—closed 3 per cent lower on Monday. On the other hand, the mid-and small-cap indices fell up to 4 per cent. Sharp losses in the Indian stock market caused investors to lose nearly ₹15 lakh crore in a single session.

The recent sharp market decline in the US and other major markets globally follows a weak July payroll report released on Friday. The report revealed that the US unemployment rate increased to 4.3 per cent last month, marking the fourth consecutive monthly rise. This spooked investors and instilled fears that the US recession was slipping into a recession.

In addition, rising tensions in the Middle East, fear of a reverse yen carry trade after the Bank of Japan (BoJ) 's rate hike, unimpressive quarterly earnings, and inflated valuations have contributed to the market rout.

Global markets have corrected sharply over the last two days due to a disappointing job scenario in the US, which led to fears of recession, coupled with the fear of a reverse yen carry trade following an interest rate hike in Japan," Dhiraj Relli, MD & CEO at HDFC Securities, observed.

Is US recession fear for real?

According to a Bloomberg report, economists from the Goldman Sachs Group have increased the probability of a recession in the United States in the next year to 25 per cent from 15 per cent.

There are some signs of a slowdown in the US economy. However, it is too early to think that the US is likely to face a recession soon. Traditionally, an economy faces a recession if its gross domestic product (GDP) goes negative for two consecutive quarters.

According to data released by the US Bureau of Economic Analysis, the US GDP grew at a rate of 2.8 per cent for the April to June quarter this year. The US growth rate seems unlikely to slip into the negative so quickly.

"It is too early to fear that the US economy is to slip into a recession. There is no clear signal that the US economy is going to see a sudden and sharp crash," said G. Chokkalingam, the founder and head of research at Equinomics Research Private Ltd.

Experts suggest that the increase in the unemployment rate in July may be attributed to a growing labour force rather than an economic slowdown.

Another Bloomberg report on August 5 said the US services sector rose in July after contracting a month earlier by the most in four years.

"The Institute for Supply Management’s (ISM) index of services rose 2.6 points to 51.4. Readings above 50 indicate expansion, and the July figure was slightly firmer than the median projection in a Bloomberg survey of economists. Last week, ISM data showed the biggest contraction in manufacturing in eight months," the Bloomberg report said.

What should Indian stock market investors do?

Experts expect the markets to stabilise globally in the coming few sessions. Many see this correction as healthy for the Indian market, which was at unreasonably high valuations.

The other angle to look at it is that a global economic slowdown benefits India in a way. An economic slowdown in the West causes oil prices to crash. As India is the third largest importer of crude oil globally, a fall in crude oil prices is positive for its economy as it improves the exchange rate and forex reserves and trims the fiscal deficit.

"Indian investors must not worry too much about a US recession. I have seen that the pain of the West is a gain for India. It was proven in 2008-09 and 2016. Whenever there is a recession fear in the US or if there are deflationary signs, oil prices crack badly. This is a major positive for the Indian economy and the market," said Chokkalingam.

Economic indicators are important, but the role of liquidity and valuations are often ignored in the market.

"The US market will stabilise in the next few days. The biggest reason behind this fall in the global markets is high valuation and the mismatch between liquidity and market capitalisation. Except for the Chinese markets, the rest of the world's major markets are at high valuations," Chokkalingam observed.

Chokkalingam advises Indian investors to focus more on large caps, which should account for at least 50 per cent of their exposure to equities.

"Invest in good large-cap stocks with a defensive approach. Keep 5-10 per cent cash, and the remaining 40 per cent can be invested in small and midcaps. Do not compromise on the quality of the management, quality of the balance sheet and valuation comfort," said Chokkalingam.

Negative global sentiment can impact foreign capital inflows in India, causing some volatility in the Indian market.

"Though India is relatively insulated from the world, it could still be impacted if the global risk appetite is negatively impacted, affecting the FPI flows and hurting India’s exports. The outcome of the US presidential elections (Nov 2024) and Indian state elections (Oct 2024) are other triggers to watch out for," said Relli.

"Global sentiments need to stabilise before the Nifty can start recovering. Traders can start bottom fishing for small upsides (with stop losses in place), while investors may wait for stability. Risk-averse investors may look to take profits partly and lighten their equity portfolio. They could sit on cash for some time and then look to deploy it after a reasonable price and/or time correction," Relli said.

Read all market-related news here

Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.