Risk of a US recession real, say experts, second half of 2024 unlikely to be as smooth

India Inc's earnings have been stable, but H2CY24 is likely not expected to be as smooth as the past 6-9 months have been, Taher Badshah of Invesco Mutual Fund told CNBC-TV18 in a conversation. "We see possibility of rates falling in US, and also in India. I won't be surprised if we start of with a 20-25 bps rate cut in India and in 6 months' time reach to 50 bps, if US commences on its rate cycle," Taher added.

Read More: The MPC is meeting this week to decide on key interest rates

Invesco Mutual Fund added that their approach has not changed yet, and they continue to scout of ideas. "In some over-valued parts, the correction is welcome, as it will give us better entry points," he said, adding that the markets may moderate now, more mindful of the risks to the rally.

Key Risks at Play:

1. Yen Carry Trade
The Japanese Yen has risen more than 2 percent versus the dollar on the unwinding of carry trades, while yields of Japan's 10-year government bonds fell most since 2003. The forex strategy of 'carry trade' had been enabling borrowing in the Yen and investing in higher-yield assets, which is now getting undone, causing sudden losses to forex traders.

Read More: Know All About the Yen Carry Trade

The Yen-funded carry trades were popular in emerging markets amid low volatility as investors bet Japanese rates would remain low for longer. But Bank of Japan has raised rates for a second time at its latest meeting signalling it may not be done yet.

2. US Recession Fears
US bond markets are betting that the American economy is on the verge of a recession and the Federal Reserve has to start easing the monetary policy aggressively. This is fuelling a rally US bond market, with market participants raising spectre of a hand landing again.

"There is some recognition that the probability of a US recession has gone up and the market has not corrected to a level to have discounted all the negative news," Arvind Sanger told CNBC-TV18 in a conversation on August 5, adding that the market meltdown was 'over due', and the risk of a recession is 'real'.

Some major US companies have reported negative consumer demand in the latest quarterly earnings, increasing risks to the economy, Sanger said, adding, "The probability of a recession in the fourth quarter is probably 50:50."

Rajeev Agrawal, Doordarshi India Fund told CNBC-TV18 that the talk of an intra-meeting Fed cut is gaining ground. "This does seem like risk of negative events has increased the probability that Fed will move," Agrawal said.

3. Geopolitical Risks
Israel is bracing up for the possibility of an attack from Iran and militias backed by the regime, in retaliation to the recent assassinations of senior Hezbollah and Hamas leaderships. As a result, oil analysts are tracking the developments, with Iran-backed group Hezbollah saying the conflict with Israel had entered a new phase. Oil futures are lower in a volatile session on Monday, with US recession fears and supply worries from middle-east interplaying to keep oil prices choppy.

Asset classes such gold and cryptocurrencies too are facing intense volatility, with gold dropping sharply and to recover later on August 5 as investors digest the equity selloff and unrest in the Middle East. Bitcoin had fallen by 10 percent at one point of time on August 5, testing $53,000, with Ether too eroding nearly a fifth of its value.

Invesco's Taher Badshah added investors need to now be aware of risks, and must keep diversity in the portfolio. "If we get a correction of 5-7 percent variety and some opportunities, we are prepared. But we must prepare for risks more than returns," Badshah added.

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