Global Funds turn to India amid financial market uncertainties: Report #IndiaFinance

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

A consistent influx of foreign capital has propelled the nation’s bonds to be among the top performers in developing markets this year, while the country’s stock market reached a record high last month, supported by strong domestic liquidity. India’s attractiveness stems from a combination of structural factors, including stable political relationships with both the US and Russia, capital controls that limit speculative capital flows, and a currency less affected by significant fluctuations in the dollar compared to its emerging market counterparts.

India’s separation from global markets was highlighted last week, as its sovereign bonds remained relatively stable despite a worldwide selloff of US Treasuries. The nation has become a significant emerging market investment for abrdn plc., especially in anticipation of the US presidential election on November 5, as hedge funds prepare for an increase in global volatility.

“India’s local bond market is relatively insulated from the volatility of global markets, remaining peaceful amidst the storm,” said Edward Ng, a bond fund manager at Nikko Asset Management Co. “Given the market’s low volatility, we remain comfortable staying invested in Indian bonds,” which may outperform in a strong-dollar environment, he said.

A key pillar of India’s resilience is its currency — once one of Asia’s most volatile. For much of 2024, the rupee has been stuck between 82.8 and 84.1 per dollar due to Reserve Bank of India’s interventions.

Data compiled by Bloomberg show that the currency has only shaved 1 percentage point off the returns on Indian bonds 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. “In this world of uncertainty it ain’t a bad place to be.”

To be sure, India isn’t a hotspot for global equity investors right now. Signs of a slowdown in the country’s robust economic growth and a rebound in Chinese stocks have led to outflows of $8.8 billion from local shares in October, set for a record. While domestic investors’ purchases have evened out foreign outflows, the stock market is still on track for its worst month since March 2020.

The selloff hasn’t led to dramatic swings in the market. The 60-day historical volatility for the benchmark NSE Nifty 50 Index stands at 13.2% — 1.95 percentage points lower than the S&P 500 Index, indicating relative stability in comparison.

UBS Global Wealth Management suggests the selloff is a buying opportunity as the soft patch in India’s growth and earnings appears transitory. The view followed Goldman Sachs Group Inc. tactically lowering local shares to neutral from overweight last week.

India isn’t the only emerging economy offering a low correlation to global sentiment. Amundi SA and William Blair & Company, LLC have said they favor frontier markets such as Nigeria and Kazakhstan, as potential buffers against US election-driven turmoil.

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

“India local still screens fairly attractively to us,” compared with other assets globally like dollar-denominated debt, said Leonard Kwan, portfolio manager of T. Rowe Price Group Inc.’s dynamic EM bond strategy. “We’re overweight rather than in line with the benchmark” on India.