Time for greenbacks to return to India? For clues, look to Warren Buffet

US jobs data showed a sharp decline in job additions to 114,000 in July, down from 216,000 in May and 179,000 in June, sparking concerns about the state of the economy. At the same time, market anxiety over inflated profit expectations from artificial intelligence baked into tech stock prices has been growing. These worries were amplified by Warren Buffett’s decision to offload half of his Apple stake—a cornerstone of Berkshire Hathaway—a move that sent shockwaves through the market.

India, while fundamentally strong, is not immune to these external headwinds.

Buffett's moves and market reaction

Earlier this quarter, Buffett had already offloaded stocks in Bank of America and BYD, boosting his cash reserves to $280 billion. Buffett's preference for cash over stocks sends a clear signal: expect falling stock prices, rising bond prices, and new investment opportunities, underscoring the need to maintain liquidity.

Read this | Warren Buffett’s cash pile soars. What it could mean for you.

The market now anticipates an emergency meeting of the US Federal Reserve's Open Market Committee before the scheduled 18 September meeting, potentially announcing an immediate rate cut. US unemployment, previously at its lowest since the 1960s, is rising again, hitting 4.3% in July after breaching 4% in May and climbing to 4.1% in June. There is a growing sentiment that the Fed has delayed rate cuts too long, having missed the opportunity at its last meeting in July.

This anticipation has rippled across global markets, exacerbated by the Bank of Japan's (BoJ) decision on 31 July to raise rates for the second time this year to 0.25%, up from the 0-0.1% range set in March. The BoJ's concerns about the yen's weakening against the dollar and rising domestic inflation, though only at 2.6%, prompted this move. The March rate hike ended a negative rate regime that began in 2016 and marked the first BoJ rate increase in 17 years.

When interest rates rise in Japan, the carry trade unwinds. With Japan’s historically ultra-low rates, investors have borrowed in yen to invest in higher-yielding currency assets. However, as the BoJ hikes rates, the interest differential between yen and dollar assets narrows. Investors, seeing reduced returns, begin selling off assets to redeploy funds, increasing market selling pressure.

The unwinding of the carry trade and anticipation of the Fed lowering policy rates have sparked market turmoil. Despite a brief recovery, both equity and bond prices are expected to remain volatile in the near term. As US interest rates decrease to counter slowing economic growth, US stocks become less attractive for funds exiting bonds with falling yields. After a period of heightened volatility, during which funds may seek the safety of US treasuries despite their lower yields, global investors are likely to start seeking profits in emerging market securities once again.

Implications for Indian markets

Indian markets are overpriced by global comparison. However, India remains the fastest-growing large economy, with a growing preference among investors for market-linked instruments, moving away from the traditional habit of placing the bulk of savings in bank fixed deposits. The prospects of corporate earnings growth driven by rapid economic expansion and the continued influx of domestic savings into the market make the Indian market a relatively attractive option.

More here | Why fear is sweeping markets everywhere

In this context, the impact of a slowing US economy on India’s technology companies must be considered. Indian IT firms need to diversify their market geography and expand into newer technology offerings linked to Artificial Intelligence.

Another factor to consider is the likely outcome of the ongoing wars in Ukraine and the Middle East. Both conflicts could escalate in the short term, with Ukraine deploying newly acquired F-16 fighter jets and Iran and its allies seeking revenge on Israel for the killings of senior Hamas and Hezbollah leaders. However, these conflicts cannot drag on indefinitely. Once they settle down, global growth could benefit from lower energy prices, resumed traffic through the Suez Canal, and increased government spending in Europe and the US as funds are redirected from military aid.

Also read | Israel’s latest Hamas assassination could have serious repercussions for India

The sell-off, led by Buffett, should be followed by an additional flow of global funds to India and other emerging markets after a period of uncertainty. The key is to adopt strategies to navigate short-term turbulence and capitalize on medium-term growth opportunities.