Emerging-Market Carnage Sidesteps India

As emerging-market stocks reel under the pressure of a rising dollar and fiery trade rhetoric, Indian equities are charting a different course.

The nation’s benchmark S&P BSE Sensex Index rose 7.5 percent in the second quarter in local-currency terms, the best performance among developing nations. That’s as the MSCI Emerging Markets Index tumbled almost 9 percent.

The world’s fastest-growing major economy is relatively insulated from trade risks due to its massive domestic market and burgeoning middle class. And while India hasn’t been immune to outflows, buying by local funds has more than made up for this and helped the Sensex to so far shrug off headwinds such as rising oil prices and a weak rupee.

“The EM pack has suffered due to outflows and a strong dollar,” said Sunil Sharma, who oversees $1 billion of assets as chief investment officer at Sanctum Wealth Management Pvt. in Mumbai. “India has been resilient because of its strong economy and local flows, even as the trade war rhetoric rises.”

Domestic funds have bought a net $4.5 billion of Indian shares since the end of March, compared with $2.9 billion of foreign outflows, data compiled by Bloomberg show. Much of the local buying came in April and May, when a net 245 billion rupees ($3.6 billion) was pumped into equity funds amid poor returns from gold and real estate.

Data released in late May showing the economy grew 7.7 percent from a year earlier in the first quarter has also added to the allure of stocks.

“Domestic flows, while having moderated from peak levels, are still quite sizable and they are lending support to the market,” said Harsha Upadhyaya, who oversees $3.4 billion in equities as chief investment officer at Kotak Mahindra Asset Management Co. in Mumbai.

Also, year-to-date withdrawals of less than $800 million from Indian stocks are “very small as markets like Indonesia and Thailand have seen much larger outflows,” Mark Matthews, head of Asia research at Bank Julius Baer & Co., said in an interview in Mumbai. “We saw foreign investors subscribe to Indian IPOs. They wouldn’t do that unless they want to be in India.”

Resilience Tested

Still, the idea that Indian equities are less prone than others to global shocks may be tested if the price of oil — the nation’s top import — remains elevated and the trade skirmish worsens and drives a flight to haven assets.

The rupee slid about 5 percent in the second quarter and hit a record low last week. That’s left global funds with losses in dollar terms, and has increased the risk of the stock market becoming overly reliant on domestic buying. The upshot is that equity investors must tone down their return expectations, according to Aditya Birla Sun Life AMC Ltd.

“Equity as an asset class in India will yield moderate returns this financial year — about 12 to 13 percent,” said Mahesh Patil, who manages $6.3 billion of stocks at Aditya Birla, the nation’s third-largest money manager. “It’s very difficult to expect positive foreign flows in India this year.”