Financial markets around the world are affected by a strengthening US dollar. If you look at the commentary from the US Federal Reserve and other experts, interest rates will likely remain high as inflation remains stubbornly high. Jamie Dimon, chairman and CEO at JP Morgan, one of the biggest banks in the world, said that the world is not ready for US interest rates at 7%. That could be a staggering situation for the world’s number one economy that is not used to high-interest rates. There was always a chance for those in America to borrow money at near zero per cent interest rates and put it in Indian bonds or assets at a higher potential rate of return. With interest rates surging in America, there is barely any opportunity to do that arbitrage. If interest rates rise further in the US, American investors could turn risk-averse and pull money out of risky assets. Emerging market stocks are already witnessing a selloff.
As the US dollar strengthens, emerging markets face the heat. According to a study by the International Monetary Fund, the rising US dollar leads to the widening of current account deficits for most emerging economies. That means the pressure on other currencies rises. According to the latest RBI data, India’s current account deficit widened sequentially for the quarter to June 2023. There was a visible decline in remittances, too. That is no good news for the Indian rupee as it will likely remain under pressure.
All of these factors in the external situation have an impact on the stock market, too. Benchmark indices like Nifty and Sensex fell after hitting record highs. There is strong resistance at peak levels, and share prices witness a selloff as they try to scale new highs.
Over the past month, the Nifty IT sector index has outperformed these indices. That shows investors are already alert about the potential strain on the Indian rupee. IT services companies are exporters and generate foreign exchange. A falling rupee helps exporters and hurts importers. As IT sector companies are among the first to announce quarterly financial results, investors are betting on a rupee fall. However, other companies rely on overseas revenue. In the automobile sector, Tata Motors, the owner of Jaguar Land Rover, generates most of its revenue and profit overseas. Tata Motors shares are showing resilience. Maruti Suzuki, India’s biggest passenger car company, also saw a share price rally with solid exports to support the business growth. At the same time, shares of Mahindra and Mahindra, a company that relies mainly on domestic sales, witnessed a decline in the share price.
If you want to invest in companies based on the prevailing market situation where the US dollar strengthens, and interest rates stay high, you need to identify companies that benefit from the situation. You can either do that with the help of a financial advisor or use technology to help you create a basket.
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