By IndiaHub 
Will the US go into recession?
The recent news of contraction in the US economy has already put the economy on the path to recession. It seems likely that the US will go into a recession for a short period. While technology giants have given good results, traditional business seems to have paused investments. Tougher immigration policies have led to businesses anticipating higher labour costs. Inflation rising due to both an increase in material cost and an increase in labour cost has resulted in lower consumption. The recessionary spiral is visible in the current scenario. While the Fed can play a critical part by reducing rates, the economic uncertainty might still be enough to create a slowdown large enough to spiral down into a recession.
The famous idiom “When the US sneezes, the world catches a cold” still holds. The dependency of smaller countries on exports to the US remains critical, and the trade relationship between China and the US would also have a significant impact on the global economy. The International Monetary Fund (IMF) has cut the growth forecast for the world economy, though there is no global recession forecast as yet. China is taking significant liquidity measures to boost growth, and other countries will also take more actions to protect their growth while the US readjusts to its new normal. The silver lining in this is only the fact that this US recession, if it does happen, would not be due to external cataclysmic events such as a pandemic or war, but due to a consequence of policy action. Hence, it can also subside very quickly once the policy becomes more certain. If it is not a prolonged recession, the rebound would also be very quick.
Potential impact on India
From an Indian perspective, the impact of a US recession is largely threefold (i) Impact on firms which are directly exporting goods or services to the US; (ii) Chinese reaction of reducing US exports by dumping cheaper goods to other countries which might challenge domestic manufacturers and (iii) Impact on commodity prices can create small pockets of opportunities for sub-sectors e.g. oil prices coming down can lead to unexpected gains for relevant businesses. India would also have to be wary of volatile capital flows during uncertain times. While a trade deal between the US and India can help navigate the impact on exporters and manufacturers, it would still cause market distortions.
From an investor lens, this is an eventful time where, while short-term uncertainty prevails, there are also pockets of opportunities that can be very useful.
Opportunities in an uncertain market
The most obvious investment choice in an uncertain market has always been gold. The rise in gold prices between January and April 2025 seemed to provide further evidence to this time-tested theory. However, now that gold is at an all-time high with trade deals being negotiated to reduce uncertainty, is gold still a good investment choice? It is likely that the return on gold from this point onward would be muted if the news flows in terms of trade deals becomes positive.
NIFTY, after a volatile time, has also migrated near to its all-time high level. The relief rally is driven by global inflows returning as India is less impacted by the tariff tantrum. While China and other East Asian countries negotiate their respective trade partnerships with the US, India seems ahead in the race to negotiate a trade deal. Global capital allocation, hence, seems to have worked in favour of India during this phase.
Before the tariff tantrum began, Indian equities had already seen a valuation correction. However, earnings for Indian corporates, including the latest Q4 results, have not shown significant growth. While Q3 was expected to be muted, Q4 results have not been as robust as expected. As the global economy slows down, it would be challenging for the domestic economy to sustain high growth momentum in Indian corporates.
The Reserve Bank of India (RBI) is on a path to boost growth by cutting interest rates and increasing liquidity, however, the impact of such measures often has a lag on private capex and subsequent earnings. It would thus not be surprising that high valuation and high valuation multiplication would lead to another correction. As global capital allocation adjusts to the new paradigm of trade economy, the short-term money that came to India in the interim would recede. Thus, investing in Indian equities at this point might not lead to sustainable returns and could potentially lead to very low returns in the short term if the expected dip in valuations is significant.
The most effective asset class in an uncertain environment in India seems to be bonds. The credit cycle seems robust with corporates having reduced debt over the last five years. While the microfinance sector has seen some downward trends, the rest of the financial sector seems to be healthy. With the interest rate cycle poised to move further downwards, the yields on recent bond issuances would the more attractive currently than in the next two years. Given India is expected to continue a growth path, albeit slower than expected, large-scale credit events are unlikely. Thus, if gold and equity markets stall due to global uncertainty, bonds and fixed income shall be the best asset class for investors to earn 8-14% over the next two years.