Global funds eye India amid financial shock

India is becoming a destination for investors seeking refuge from the financial volatility associated with the US election.

A steady flow of foreign capital has made the country’s bonds among the top performers in emerging markets this year, while the country’s stock market hit a record high last month, buoyed by strong domestic liquidity. India’s appeal is driven by a mix of structural factors: stable political ties with both the US and Russia, capital controls that prevent hot money flows and a currency that is less affected by big dollar moves than its emerging market peers.

India’s divergence from global markets was evident last week when its sovereign bonds remained relatively flat despite a global sell-off in US Treasuries. The nation has become a key emerging market bet for ABRDN, especially ahead of the US presidential election on November 5 as hedge funds prepare for a pickup in global volatility.

“India’s domestic bond market is relatively unscathed from the volatility of global markets, remaining calm amid the storm,” said Edward Ng, bond fund manager at Nikko Asset Management Co. bonds,” which could move in a strong-dollar environment, he said.

A key pillar of India’s resilience is its currency – once one of Asia’s most volatile. The rupee is stuck between 82.8 and 84.1 per dollar for most of 2024 due to Reserve Bank of India intervention.

Data compiled by Bloomberg show that the currency has reduced returns on Indian bonds by just 1 percent this year, less than half the rate of currency-related losses on emerging market local-currency bonds overall.

The rupee offers “minimal” volatility, Edwin Gutierrez, head of EM sovereign debt at ABRDN, said in an interview. “That’s not a bad place to be in this world of uncertainty.”

To be sure, India is not a hotspot for global equity investors right now. Signs of a slowdown in the country’s strong economic growth and a rebound in Chinese stocks led to an outflow of $8.8 billion from domestic stocks in October, a record set. While domestic investor buying has evened out foreign outflows, the stock market is still on track for its worst month since March 2020.

The sell-off has not led to dramatic changes in the market. The 60-day historical volatility for the benchmark NSE Nifty 50 index is 13.2% – 1.95 percentage points lower than the S&P 500 index, indicating relative stability in comparison.

UBS Global Wealth Management suggests that the selloff is a buying opportunity as the soft patch in India’s growth and earnings looks temporary. Goldman Sachs Group Inc. followed this view last week by strategically downgrading domestic shares from overweight to neutral.

India is not the only emerging economy that offers a low correlation with global sentiment. Amundi SA and William Blair & Co., LLC have said they favor frontier markets like Nigeria and Kazakhstan as potential buffers against the U.S. election-driven turmoil.

Yet these alternatives lack the liquidity and depth of India’s $1.3 trillion sovereign debt market and $5 trillion stocks. The country is also expected to attract more offshore funds as part of its inclusion in JPMorgan’s bond index — BlackRock Inc. And Amundi SA has launched an ETF to ride that wave.

India is set to join Bloomberg’s EM gauge from January.

“Indian domestic still screens us attractively,” compared to global assets like dollar-denominated debt, T. said Leonard Kwan, portfolio manager of dynamic EM bond strategies at Rowe Price Group Inc. “Instead of conforming to the benchmark, we are overweight” on India.