India

India is seeing net capital outflows for the first time in a generation. The central bank is selling foreign reserves to defend the rupee, which is draining banking system liquidity. The latter risks derailing the nascent credit revival. Indian stock prices remain vulnerable.

Indian stocks have further downside in absolute terms as profits disappoint. Their underperformance versus the EM equity benchmark, however, is late, which warrants a shift from underweight to neutral allocation.

Investors should not count on buoyant growth in the ASEAN and Indian economies because of manufacturing relocation away from China in the next couple of years.

For the next few months at least, inflation risk trumps recession risk for both US markets and world markets. This because, correctly gauged, the US jobs market is still supply-constrained with ‘jobs looking for a worker’ exceeding ‘workers looking for a job’ by 0.4 percent. A still supply-constrained US jobs market cannot enter a demand-driven recession until it flips back to demand-constrained, so bond investors should underweight duration. Plus: a new tactical trade is overweight India (INDA).

The Indian rupee remains vulnerable to further depreciation amid slowing growth, tight domestic policy, and fragile capital flows. Trade risks and a weakening external balance will likely keep INR underperforming EM Asia peers.