We are familiar with domestic macroeconomic factors affecting stock market. After all, domestically the impact of macroeconomic variables on stock prices is quite pronounced. We are referring to factors like inflation, interest rates, GDP growth and industrial growth having a meaningful impact on stock prices. But when we talk of macro impact, we are not just referring to domestic macros but to global macros too. The world markets are interconnected and impacts can be transmitted quite fast across markets through portfolio investors and hedge funds. We saw that in the case of Lehman and Bear Stearns in 2008. From a global standpoint, let us understand how macroeconomic variables and stock market performance interface with each other.
Here are 8 ways in which global macros impact Indian stock prices..
The US GDP growth and the growth in world GDP is a key determinant of the health of Indian stock market returns. Higher growth in the US and other developed markets means greater trade flow and an impact on GDP. It also means good news for global companies with globally spread business models like IT, pharma and auto ancillaries.
US interest rates have a very deep impact on Indian stock prices. Normally, a sharp rise in the US Fed rates has resulted in a sharp fall in the Indian stock markets. When US rates rise, the risk-off money starts flowing towards safer markets and that exposes markets like India to a huge sell-off. We saw that manifest itself in January 2016 when Fed rates were hiked for the first time.
Demand recovery in Europe is another key factor that impacts Indian stock markets. While the US continues to be a major market for sectors like IT and Pharma, both these sectors have gradually building a strong European franchise. Europe is a big market for textiles and auto ancillaries and a recovery in the EU region can have positive implications for a plethora of Indian stocks.
If you really are not familiar with Chinese currency wars, then you just need to look back at what happened in September 2015. China did not trigger a currency war but they managed to weaken the Yuan by shifting the range. This forced most emerging markets to resort to competitive devaluations of their currency leading to a quick sell-off. Of course, the situation did not precipitate in 2015 but the risk of a China triggered currency war always exists.
We have seen the negative impact of geopolitical tensions in the Middle East and West Asia. India still relies on imports for over 85% of its oil needs and the Gulf region still supplies more than 50% of India’s daily oil needs. Any disruption in supply will mean higher oil prices. Middle East and West Asia are also where most of the key trade routes of oil are located so any disruption in these areas will mean immediate fallout on crude oil prices with negative implications for Indian stock markets.
Black swan events maybe rare but their impact is profound. In the last few years, the biggest black swan events have come from the global segment. Back in 2008 we saw the bankruptcy of Bear Sterns and Lehman Brothers. At the same time Citi, Morgan and Goldman came to the brink. The impact on India was huge. In 2010 the big global black swan was the European crisis and in 2011 it was the rating downgrade of the US economy. Black swans can have a huge trigger impact on the Indian stock markets.
How the monetary policy of global central banks shapes up is a factor that has acquired a lot of importance in the last couple of years. Will the global central banks become hawkish? That is not great news for Indian stock markets. Similarly, will the central banks look to curb liquidity? That is again not a very positive feeling for the Indian stock markets. We have seen their impact in the past and they remain potent risks for Indian stock markets.
How will the trade and business openness shape up in the coming months? This is not exactly a macro event but more policy related. Let us look at some of them. Trump coming down heavily on H1-B visas is negative for Indian IT industry. Similarly, the revival of the Trans-Pacific partnership (TPP) is not good news for India. OPEC, the world’s original cartel, has come together with Russia and Mexico to cut daily oil output by 1.8 million bpd. This is again a negative for India as it keeps oil prices high.
The crux of the matter is that global macros and policy decisions have a much bigger impact on Indian stocks than we care to imagine. FPIs are global fund allocators and they will quickly shift their funds to the market with the best risk-adjusted returns. It is this seamless movement of funds that transmits risks globally!