Donald Trump (file photo)By Jaspreet Kalra
MUMBAI – Global investors are likely to find relative safety in India’s financial markets from the spillover of Donald Trump’s economic policies, including any protectionist trade policies that could fuel emerging market volatility.
Trump’s decisive election victory last week and his impending return to the White House next month have created great uncertainty among investors.
India’s strong economic growth, limited exposure to Chinese and US consumer markets, robust local interest in equities and a central bank committed to ensuring currency stability will strengthen the country’s appeal amid global turmoil, say investors and analysts.
Stocks in Asia’s third-largest economy are also likely to find support from strong domestic buying, given Indian companies’ limited dependence on export revenues.
That’s important as markets fear Trump will reintroduce his “America First” policies, raising the specter of a global trade war.
China is on the front lines of the risk as the former president has threatened tariffs of 60% or more on all Chinese imports, likely putting more pressure on the world’s second-largest economy.
The tariffs on China are expected to have a negative impact on export-oriented Asian economies, according to analysts at Societe Generale, who see India as better positioned than Korea and Taiwan to absorb the fallout.
“Without any major budget announcement, China is likely to face downward pressure from Trump’s victory,” said Sat Duhra, a Hong Kong-based portfolio manager of Janus Henderson Investors’ Asia (ex-Japan) equity team.
Some investors had left India last month to buy Chinese stocks, but “there could be a return to India in a quicker-than-expected time frame” due to India’s safe-haven status, Duhra said.
While foreign investors pulled a record $11.2 billion out of Indian equities in October, share purchases by domestic institutional investors rose to a record high of around $12.7 billion in the same month, limiting the decline in benchmark indices.
Domestic investors see India benefiting from U.S. companies’ supply chain diversification in sectors such as electronic manufacturing, chemicals and pharmaceuticals, said Trideep Bhattacharya, president and chief investment officer for equities at Edelweiss Mutual Fund.
India’s economic fortunes have also changed since Trump’s last presidency, when GDP slowed from a robust pace of 8.2% in the most recent financial year ending March 2024.
A potential dampener for global investors is the high valuations of Indian equities.
The MSCI India index, which covers about 85% of India’s equity assets, trades at a trailing twelve-month average price-to-earnings ratio of 22.8, well above the 12.08 price-to-earnings ratio for MSCI’s emerging markets equities.
Zurich-based Vontobel Asset Management is cautious on Indian equities but bullish on the country’s government bonds and finds the rupee an attractive carry trade currency.
Indian government bonds represent an attractive diversification, while the central bank’s stabilization policy makes the rupee one of the best risk-adjusted carry trades, says Carl Vermassen, fixed income portfolio manager at Vontobel.
The country’s government bonds were included in the JPMorgan Global Emerging Market Debt Index earlier this year and are expected to be included in two more global bond indices in 2025.
The rupee is “fortunately uncorrelated with other emerging market currencies, while at the same time having a high beta to the dollar. This makes it a unique emerging market asset,” Vermassen said.
While the rupee bottomed on November 6 as the US elections signaled a Trump comeback, the 0.2% decline remained muted compared to regional peers, which fell as much as 1.7%.
(Reporting by Jaspreet Kalra, additional reporting by Bharath Rajeswaran; Editing by Shri Navaratnam)
