Moneycontrol Pro Weekender | As global yields rise and the dollar softens, where do Indian equities stand?

Dear Reader,

The Trump regime’s ban on foreign enrolments at Harvard University may not appear to have much of a connection with the financial markets. But it does, in at least two ways. First, it is yet another example of the unreliability of the regime. Second, it will erode the attraction of the US for bright foreign students, which in the final analysis will hurt the US itself. Let’s leave out the suppression of dissent, a policy increasingly being adopted with gusto across democracies, because markets are oblivious to it.

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Is it this increased uncertainty that has pushed up yields across many countries? One school of thought believes so, and they point out that the rise in long-term bond yields is not restricted to the US, but is also true for Japan, for the UK, for France and Germany and even for Australia. They say it is the term premium, or the compensation demanded by the investor for holding long-term debt, rather than rolling over short-term bills, that has gone up. And why is the term premium up? Explanations include higher inflation, the erosion of policy credibility, geopolitics, and rising fiscal strain. Tariffs too, and their impact on trade. Not to speak of Trump’s zigzag, on-off, stream-of-consciousness style of governance. In one word, unpredictability.

Recent attention has shifted to the US fiscal deficit, consequent upon Donald Trump’s Big Beautiful Bill, which will allegedly balloon out the deficit and government debt. Much will depend on the level at which the tariffs settle. Even at the minimum 10 percent level, it will be an inflationary shock to the US. But much is still up in the air, and the title of the IMF’s April edition of its Fiscal Monitor publication is ‘Fiscal Policy under Uncertainty’. It said, “In the United States, substantial fiscal adjustments are necessary to put public debt on a decisively downward path, which will require building social consensus to address ongoing fiscal imbalances.” There’s no sign of that happening. For a contrarian view, do read Sashi Sivramkrishna’s article debunking some mainstream economic myths about fiscal deficits.

But surely the high US yields should be attracting funds into America? What is surprising is that rising US yields have been accompanied by a weaker dollar. Ananya Roy hits the nail on the head when she writes, “The policy uncertainty in the US has reduced the appeal of the US dollar as a safe haven asset. So, despite the upswing in US yields since the reciprocal tariff announcement early in April, the USD index has depreciated from 103 to less than 100 during the period... This is good news for foreign investments in Indian equities, because the return-drag from local currency depreciation is lower.”

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That is also fuel for the ‘end of American exceptionalism’ story. As this FT story, free to read for Moneycontrol Pro subscribers, says, “European and Asian investors pumped record sums into global equity funds that exclude the US market after President Donald Trump’s return to the White House.” It now turns out that “almost all the outperformance [in the US] has come from valuation changes”. Rana Foroohar rubs it in when she writes: “I think we are still in for a lot more volatility — not only in the next three months as the new normal of 10 percent across-the-board US tariffs shakes out (and this is the best-case scenario), but over the next few years, as the long-term structural trends towards a new global economic paradigm continue.”

Interestingly, the Flash or Advance Composite Purchasing Managers’ Index (PMI) for May shows that momentum in the Indian economy has been strong and increasing, despite the rise in tariffs. Indeed, the survey said, “Order books were supported by strengthening international demand for Indian goods and services, with the private sector registering the fastest rate of increase in exports in a year. Growth in non-domestic sales in the service economy accelerated to the quickest in 11 months, which more than offset a slowdown in the manufacturing industry,” adding that “Not only did employment continued to increase, but growth also hit a fresh series record (since December 2005)”. That should provide fundamental support for the Indian markets.

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A soft US dollar is good for emerging markets and DBS Economics points out that “The spreads between EM Asia govvies (govt bonds) and UST (US Treasuries) have room to compress further, making Asian fixed income attractive from a total return perspective in local currency (LCY) terms.” Aparna Iyer joins the dots between the RBI and Indian debt and forex markets here.

The Indian economy may be doing well, but for the equity markets, the recent rally has once again shone the spotlight on valuations. Canara Robeco AMC's head of equities said the large caps are in a fair valuation zone whereas mid and small caps still continue to be expensive by 10-20 percent compared to their historical fair valuations. For instance, while defence stocks have been much sought after, analysts remain cautious on high valuations. Sridhar Sriram, investment director at Enam Holdings says, “This isn’t the time to be a hero.”

And just in case this isn’t enough doom and gloom, Abhijit Dutta reminds us of how climate change is adding to that humongous pile of risk.

Wait! I was about to end this missive, but Trump has just tweeted that he intends to impose a 50 percent tariff on Europe, starting June 1. That settles it—the song of the week can be no other than the Rolling Stones’ classic, ‘Sympathy for the Devil’, with these lines:

‘Pleased to meet you

Hope you guess my name, oh yeah

But what's puzzlin' you

Is the nature of my game’.

There should be little difficulty in guessing his name.

Cheers,

Manas Chakravarty

In case you missed them, here are some of the other stories and insights we published this week, apart from our technical picks in the equity, commodity, and forex markets:

Stocks

Is Cantabil the next retail growth story? Weekly tactical pick, ITC, LTTS, TBO Tek, Indigo, IndusInd Bank – Is the worst over? Repco Home Finance, Operation Sindoor, a shot in the arm for Indian defence stocks, Which companies are key beneficiaries of the defence indigenisation push? Belrise IPO, Dixon, Divi’s Lab, Saregama, Bikaji Foods, NCC, ITC Hotels, Ixigo, Amber Enterprises, Hyundai, Emami