A perfect storm of global events has come together to trigger a correction in stock markets across the world. The first signs of weakness came from the so-called Magnificent Seven stocks, which rode the Artificial Intelligence (AI) narrative to propel the US Nasdaq-100 by threefold from Covid lows. Now though, a string of weak quarterly earnings from Tesla, Microsoft, Alphabet et al has led investors to question if they have been over-investing in AI without material revenues to show for it. Fears of an ‘AI bubble’ have already tanked the Nasdaq 100 by 11 per cent from its recent peak.
The US tech-stock meltdown quickly snowballed into a broader market rout, after data from the US Labor Department showed unemployment spiking to a three-year high of 4.3 per cent in July. This has raised the probability of the Fed cutting rates in its upcoming September meeting, but there are now fears that Fed rate cuts may be too late to salvage the situation. Fears of a US recession then proceeded to roil stock markets across Asia such as export-driven Taiwan and South Korea; taking them down by 8 per cent plus. For Japan’s Nikkei 225, down over 12 per cent, apprehensions about an export slowdown have been compounded by the yen’s rapid gains against the dollar. The Japanese central bank has added fuel to this fire by raising policy rates to 0.25 per cent and hinting at more. The yen’s moves have also triggered the usual mutterings about a global unwinding of the yen carry trade — a source of ultra-cheap liquidity for punters. The fresh conflagration in the Middle East has added fuel to this potent mix.
Domestic stock markets do seem to have gotten away relatively lightly on Monday with less than a 3 per cent fall. However, retail investors must not be tempted into buying this dip, as they did on Budget-day or the day of election results. Yes, the Indian economy is less reliant on US exports than Asian peers and local IT services companies are not AI-driven. But ‘decoupling’ theories can fall by the wayside pretty quickly when global risk aversion takes over.
Should a risk-off scenario play out, Foreign Portfolio Investors (FPIs) can stampede out not just from stocks, but bonds too. Such episodes in 2007-08 and 2013-14 froze money markets, weakened the rupee and hurt the real economy. The domestic market is also among the priciest globally, with its price-earnings multiples at about 24 times. Early results from India Inc for Q1 FY25 indicating a deceleration in earnings offer little valuation comfort. No doubt retail investors who have entered in large numbers since Covid have come to believe in the invincibility of equities. But seasoned investors know that every major market crash in India has had global origins. Therefore, while the new investors may buy into initial dips, seasoned ones will play the waiting game. Regulators on their part must allow this much-needed correction to play out, focusing only on systemic stability.