Downside risk in short term but India likely to benefit from China outflows: AMP Capital

While all eyes are on rising inflation and costs around the world, any sudden easing of the pressure will adversely impact the stock markets, said Shane Oliver, Head of Investment Strategy and Chief Economist at AMP Capital.

“I think we are moving from a point where inflation and interest rates are the main concerns to what the impact will be on the economic outlook,” he said.

“At the moment, we are still in that trade zone where markets are slow-guessing as to which way that will go,” he added.

He believes the downside to the Indian market will come when the global bear market comes to an end and share markets decisively rebound — India might become a relative underperformer having been an outperformer through the most recent period.

Everyone is expecting a big rate hike from US Fed this time around. When asked how much of it is priced into the risky assets of equities, he replied, “Most of it is priced in at this stage. That is why there was no negative reaction by the markets.”

The Fed is continuing to rise interest rates. The markets wouldn’t be probably surprised by a 75 basis points (bps) hike in September, he added.

He expects to see more rate hikes in the early part of 2023.

According to him, India has done a lot better than global markets recently and it is not as exposed to global trade. It's not at the centre of tensions in Europe, or even in Asia, although there are issues on the border with China, they're not as intense as the ones around Taiwan.

“So that may benefit India on a longer-term basis and the other aspect is if these tensions with China continue to escalate over time, US companies cut back their exposure to China, India will benefit from that to some degree as will other Asian countries away from China,” he said.

There are grounds for optimism regarding India on a longer-term basis. “My view has been that China is on its way to becoming the world's biggest economy, but a decade or two after that, India will be the world's biggest economy. We're still talking about many decades away, but I think that is the direction we're heading in. And of course, India's relatively stable democracy is a big factor in that regard,” he mentioned.