Historical data suggest that Indian equities consistently outperformed MSCI Asia Pacific index during past instances of US yield curve inversion.
Twelve years ago, at the peak of the broadest bull run in the history of global equities, US bond yields showed signs of inversion, pointing to a depression that would morph into the subprime sinkhole within a year. Last Friday, the readings on trading screens in New York were eerily similar, but experts believe the ripples along the Atlantic seaboard would die a quiet death before they reached the Mumbai water margin.
Rather, the odds are shortening on India being a standout performer as equities dive in the US – perhaps also across the pond in the richer neighbourhoods of Europe. That should provide comfort to FPIs flocking again to Mumbai. They have invested $6.3 billion in India since January, the highest in Asia. About 60 per cent of the flows came in March alone.
Global bank HSBC believes a US slowdown didn’t have a direct impact on India's previous bull or bear phases. India has instead outperformed Asian peers during past instances of yield inversions.
"The US Fed’s (Federal Reserve) stance is now dovish, which portends that US bond yields are likely to remain soft, a scenario that should support the Indian market’s performance," said HSBC.
Historical data suggest that Indian equities consistently outperformed MSCI Asia Pacific index during past instances of US yield curve inversion. According to data compiled by HSBC, MSCI India has delivered returns of 12 per cent on average in the next six months and 3.7 per cent in the next 12 months after the first instance of US yield curve inversion.
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The US yield curve turned negative on March 22 for the first time since 2007. Three-month paper in the US is now yielding 2.45 per cent, while 10-year debt is yielding 2.38 per cent.
The yield curve is the difference between long-term and shortterm bond yields. If the difference is negative, experts believe growth is moderating and points to an increasing probability of an imminent recession. Historically, a US recession has occurred within 12 to 24 months after the first sign of inversion.
HSBC has a positive view on the Indian equity market as it believes that many of the elements required for a sustained bull run in Asia’s third-biggest economy are now in place.
