Global Stock Market Crash: What Happened and What it Means for India

August 2024 began with a wave of global market turmoil, sparked by recession fears in the US. The sharp declines and quick rebounds indicated a deep shift in global economics. This shift was seen affecting everything from exports to domestic stock markets and global investment trends, particularly in sectors like AI. For India - set for GDP growth above the global average - it showed increasing vulnerability to these global market disruptions.

The Monday Market Mayhem

On August 5th, global stock markets plummeted due to concerns over a potential US recession. Major US indexes saw significant drops, triggering a worldwide selloff. Japan’s Nikkei Index faced its worst decline since the 1987 Black Monday Crash. Crude oil prices also took a hit. In India, the Sensex and NIFTY50 fell by 2.6% and 3.3%, respectively. However, a recovery began the next day in the Asia Pacific region, with slight gains reported in NIFTY50, the Sensex, and other stocks.

Are things back to normal?

While the immediate chaos has subsided, underlying concerns remain. As of late July, the Federal Reserve maintained steady interest rates, but critical decisions await in September. For India, a rate cut could strengthen the rupee, potentially weakening the country's exports. On the other hand, a smaller interest rate gap between India and the US could attract more foreign investment to India.

Meanwhile, tensions in the Middle East—between Iran and Israel, and conflicts involving Hamas and Hezbollah—pose risks of rising crude oil prices. This could drive investors towards safer assets like gold. However, emerging markets like India might be seen as safer havens, less affected by Middle Eastern geopolitics.

Adding to the uncertainty is the disappointing job creation in the US in July, alongside a rising unemployment rate (4.3%), the highest since October 2021. This trend has heightened fears of a potential recession in late 2024 or 2025.

Further fueling market anxieties are the muted quarterly results from major tech companies, raising doubts about the return on investment (RoI) from massive spending on Generative AI (Gen AI). Despite heavy investments, recent reports suggest that the costs of building and maintaining large language models may outweigh the immediate benefits, exacerbating investor concerns.

Japan, typically known for its low interest rates that support carry trades—borrowing in Yen to invest in higher-yield markets—has hiked its rates for the second time. This complicates the profitability of carry trades, making debt more expensive for Wall Street investors, particularly those who borrowed heavily for Gen AI investments that may not deliver the anticipated returns.

Where are we headed?

But it's not time to panic—yet.

Some experts argue that it's premature to predict a US economic crash or recession, suggesting that the rise in unemployment might be due to an expanding labor force. Nevertheless, a potential US slowdown comes at a critical time for Indian markets. India’s growing prominence in the Emerging Markets Index could attract more global inflows, and reasonably priced domestic stocks could create growth opportunities, despite challenges like fluctuating oil prices and interest rates. However, rising inflation and unemployment in India are headwinds to watch.

In the short term, the RBI is likely to closely monitor US interest rate changes to align India's monetary policies. Looking further ahead, the global AI race—driven by massive investments and emerging national policies—alongside rising unemployment, could significantly impact Indian markets and the broader economy.