Written by Jaspreet Kalra
MUMBAI (Reuters) – Global investors are likely to find Indian financial markets relatively safe from the fallout from Donald Trump’s economic policies, including any protectionist trade policies that might spark volatility in emerging markets.
Trump’s decisive election victory last week and his imminent return to the White House next month have sparked uncertainty among investors.
However, investors and analysts say India’s strong economic growth, limited exposure to the Chinese and US consumer market, strong domestic appetite for stocks and a central bank dedicated to ensuring currency stability will boost the country’s appeal amid global anxiety.
Shares in Asia’s third-largest economy are also likely to find support from strong domestic buying due to Indian companies’ limited reliance on export earnings.
This is important because markets fear Trump will reintroduce “America First” policies, raising the specter of a global trade war.
China is on the front line, with the former president threatening to impose tariffs of 60% or more on all Chinese imports, which is likely to increase pressure on the world’s second-largest economy.
Tariffs imposed on China are expected to negatively impact export-oriented Asian economies, according to analysts at Société Générale, who say India is better placed than Korea and Taiwan to deal with the fallout.
“Without any major fiscal announcement, China is likely to face downward pressure from a Trump win,” said Sat Dohra, portfolio manager in Hong Kong and the Asian equities team at Janus Henderson Investors.
Some investors moved away from India to buy Chinese stocks last month, but “there may be a return to India in a faster-than-expected time frame” due to its safe haven status, Dohra said.
While foreign investors withdrew a record $11.2 billion from Indian stocks in October, purchases of stocks by domestic institutional investors rose to an all-time high of about $12.7 billion in the same month, limiting the decline in benchmark indices.
Domestic investors see India benefiting from the diversification of the supply chain of US companies, 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 the last Trump presidency when GDP was slower versus a robust pace of 8.2% in the last fiscal year ending March 2024.
One factor that may deter global investors is the high valuations of Indian stocks.
The MSCI India Index, which covers about 85% of Indian equity assets, trades at an average 12-month forward P/E ratio of 22.8, much higher than the P/E ratio of 12.08 for MSCI emerging market stocks.
Zurich-based Vontobel Asset Management is cautious on Indian stocks but bullish on the country’s sovereign bonds and sees the rupee as an attractive currency for carry trade.
Indian government bonds represent an attractive diversification, while the central bank’s foreign exchange stabilization policy makes the rupee one of the best risk-adjusted trades, said Karl Vermasen, fixed income portfolio manager at Vontobel.
The country’s government bonds joined the JPMorgan Global Emerging Markets Debt Index earlier this year, and are set to be included in two other global bond indexes in 2025.
The rupee “is fortunately uncorrelated with other emerging market currencies, while at the same time offering a high beta value to the dollar. This makes it a unique asset in emerging markets,” Vermasen said.
While the rupee hit a record low on November 6 with the US elections signaling Trump’s return, its 0.2% decline was limited compared to its counterparts in the region, which fell by as much as 1.7%.
(Reporting by Jaspreet Kalra; Additional reporting by Bharat Rajeswaran; Editing by Shri Navaratnam)