As capital allocators around the world reassess their portfolios in light of President Trump's latest tariff moves, Prashant Khemka, founder of White Oak Capital, believes capital flows into emerging markets, including India, are likely to be positive. "Capital flows are a function of market movements. If the markets are down, they tend to pause or move away. If the markets rally, they are drawn into that market," he said in an exclusive interview with Moneycontrol’s N Mahalakshmi.
According to Khemka, even over the prior 12 months until January, US markets had performed well, attracting global capital. But this year the US markets have fallen resulting in fund flows into the US slowing. "We had already seen a slowdown for the US and a normalisation of flows into EMs and India as well," he added.
He noted that the flows into India are no longer showing big negative numbers. "On certain days, they’re less negative; on some days, they're even positive. So, my assessment would be that the flows for India and EMs should be positive, as the US has underperformed emerging markets year-to-date by double digits."
Year-to-date, US’s leading benchmark index, S&P 500, has fallen 13.5% while the Nasdaq has seen an erosion of 11.86%.
Khemka emphasised that if US markets bounce back more strongly than EMs, the shift in capital flows might not occur. However, on the notion of a pullback from EMs due to global uncertainty and economic implications of the Trump Tariff increases, he said, "At least so far, we are not hearing that from our investors of any big redemptions from EMs. If there is a continued downward drift in global equities, and investors pull back or reduce their allocation to equities and move more toward bonds, then it’s possible that the allocation to equities is reduced across the board. As of now, we are not seeing or hearing that kind of concern from investors."
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On the question of whether India can be viewed as a standalone asset class considering that it is least impacted by Trump Tariff and has a good domestic-driven growth story, Khemka said it depends on market performance.
"Our market had become the largest — until about six months ago. Around October, in some indices, India had even become larger than China. If you look at the MSCI IMI, which is an all-cap index, China had come down to about 22–23%, and India had also risen to 22–23%, just a smidgen ahead of China."
Over the last six months, China has performed better and regained ground. "China is now back to about 30% of global indices, and India underperformed. So, India is now at 18% of global indices. Taiwan is, in fact, slightly higher than India," he noted.
Currently, about a third of all foreign flows into India come through India-dedicated funds, with the rest being part of broader EM allocations. He added that talk around EM ex-China funds and India as a separate asset class has also quieted down.
"India, as a standalone, continues to exist — many institutions still allocate India-dedicated mandates — but that interest hasn’t spiked. If anything, in the last six months, it has taken a bit of a backseat."
On the question of whether FII selling has peaked, Khemka said that since the October–November period, India-specific selling has slowed. "What we had seen in the January–February timeframe — or, say, December post-Trump election — was more a flow out of EMs and toward the US. That, I do believe, should slow down considerably, if not reverse — again, subject to market movements."
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