Indian equity markets were relatively resilient than global peers after the hawkish commentary from U.S. Fed Chair Jerome Powell at the Jackson Hole summit. According to market veteran Ajay Bagga, this relative strength does not paint the whole picture as Indian equities won’t he insulated from a looming global recession.

The rise since mid-June through last week was more of a bear market rally, Bagga told BQ Prime’s Niraj Shah in a Twitter Spaces chat.

India’s benchmarks fell 1.5% on Monday compared with a more than 3% decline in most global markets after Powell’s Friday comments. And domestic stocks erased most of the gains to trade higher on Tuesday.

However, according to Bagga, the U.S. may slip into recession in the next 12-24 months, and Europe in the next two quarters, if not earlier. “The markets will bottom out in anticipation of the recession, and they will start moving up in anticipation of the recovery,” he said. “They will be out of sync with the economic cycle by anything from three to six months.”

But this time around, the quantitative tightening clouds the picture, he said.

“The 2018 example shows liquidity starts drying up too fast. Have the banks kept enough reserves? Is there enough liquidity or are we going to see liquidity getting constrained as September starts? Do we get to a QE 5.0 then? Those are the big questions, no answers right now,” Bagga said.

The war in Ukraine, in conjunction with the inflationary pressures, makes for an unprecedented crisis, which has pushed central banks to move from “whatever it takes” to “whatever it breaks”.

In his speech at Jackson Hole, Powell said interest rates will have to be taken higher, where they will stay for a long period of time. The ECB is also following suit, with majority of its voting members mulling a 75-basis-point rate hike.

The Fed ‘put’ is gone, Bagga said, adding that there can be no question of slowdown in rate hikes when headline inflation is 8.6% against a target of 2%.

The central bank ‘put’ refers to an assumption that apex lenders will move to arrest excessive decline in equities and other market valuations, usually by slashing interest rates.

“The other part which was being missed out is we don’t see inflation below 8.1% on a headline basis for this year. It starts slowing down, but we don’t see it coming to 2% on a headline basis at least for the next two years,” Bagga said. “On a PCE (personal consumption expenditures) basis, from 4.8% it will come down to 2% maybe in 2024, unless you see a very sharp recession globally, which Europe might lead the world into.”