US economy may be heading for a recession in near future. This is what the Recession Probability Index that NY Fed prepares tells us. This bellwether index has been in place since 1959. Every recession since then has seen the Index crossing level minimum of 30%. According to the index, there is a 32.9% probability that there will be a recession by June 2020.

USA being nearly 17% of global GDP, and 43% of global stock market is too large to be ignored. The US recession will have its influence on the global economy as well. So, what to expect in India, if US were to go into recession? Generally, we have seen that Indian stock markets have a strong positive correlation with US stock markets. Therefore, when US stock markets do well, Indian stock markets also do well, and vice-versa. Over last 5 years, the correlation has only gotten stronger.  During the last 5 years, DJIA (US Stock Indices) has climbed from 16960 to 26922…i.e a rise of 58.8%. In comparison, during the same period, SENSEX has risen from 25024 to 39513 i.e. a rise of 59.7%. Since their pre-Lehman crises peak in 2008, both indices has nearly become double. Both markets movements have looked like carbon copies of each other over last 10 years, and it’s eerie!

So, is it safe to assume that if US stock markets tank and go through recession, same shall happen in India? In my opinion, it’s a big NO.  Fundamentally, both economies are different. On one hand while US Corporate earning has grown at 12% CAGR over last 5 years, Indian corporate earning has grown at meagre 2% CAGR. During the period, US employment reached all-time high, to the extent of being fully employed. Whereas in India, the unemployment has created a wall of worry by reaching a 40 years worst. US is worrying about inflation, where as India is worrying about stagflation. In simple words, US has to worry about likely recession, while India is already passing through a recession. India and many other emerging economies will decouple from US over next 5 years. The corporate profits and stocks markets in India and other emerging markets will do substantially better. Interest rates are likely to remain low.  Commodities and commodity stocks should do better.

If I were to make a comfortable estimate about scenario 5 years hence, I would see Sensex at double the current levels, while US DJIA would be far lesser, may be half of what Sensex has delivered. All this shall coincide with bigger chunks of FII inflow coming to India.