Q&A | India is attracting dedicated attention, 'well-positioned': Macquarie Capital's Viktor Shvets

I think what we've seen in the previous nine months or so when investors were aggressively selling India was repricing of India. In other words, the expectation of 8 percent GDP growth rates, in my view, was never achievable to begin with.

The appropriate or normal growth rates for India, in my view, have always been around 6 percent. That implies about 9 to 10 percent in nominal terms. So the market needed to adjust the growth expectations, which it's done. Secondly, adjust earnings per share expectations, which is still in process. And thirdly, adjust the multiples, which was also happening.

To me, India has one of the best long-term sustainable growth models. Not at 8 percent, but still among the fastest globally. India also has a tremendous structural story.

That's partly why India, over the last 10 or 15 years, has been treated somewhat differently from the rest of the emerging market universe. So now, with growth expectations repriced, investors are returning to India as one of the best-positioned long-term emerging markets.

So you're saying this money is coming from foreign investors who were waiting because India valuations were high?

Well, what you've also seen is it's not just India.

There was an outflow from the United States into Europe, and also significant inflows into China. Part of the reason India started to re-rate again is the perception that US exceptionalism no longer applies, at least not to the same extent as it did over the last 10 or 15 years. Investors are relocating to other markets, but selectively.

They're not really relocating into cyclical markets like Malaysia or Indonesia. They're moving into structurally stronger stories.

Take Europe - for the first time in at least 20 years, it might grow a bit faster. Capital allocation may improve, and return on equity might rise. In China, the question is whether it's been over-penalised for the nature of its economy.

How different is China today from the United States? That question wouldn’t have been asked six months ago, but it is now. In India’s case, again, there’s a strong structural story that needed time to mature. You needed to reflect that in valuations.

India isn't the only one benefiting here. There’s a global shift away from believing the US is truly exceptional.

Is this an inflection point suggesting that the worst of FII selling is over?

If you think of India specifically, I think we’ve already gone through the sell-down phase - adjustment of GDP growth rates, structural reform expectations, and valuation multiples. The only part still adjusting is earnings per share.

Earnings per share in India are always overly robust. Even now, with nominal GDP growth at around 10 percent, it’s hard to justify EPS growth of 17 or 18 percent, for instance.

So yes, some adjustment is still pending. But a lot of it has already taken place over the past six to nine months.

Will money generally move out of US equities now?

Yes, that’s already happening. There are shifts underway: it’s not just about a trade war; it's about a broader reshaping of America socially, culturally, and economically. This process raises the risk premium on US assets, which is why money is flowing out.

Still, the US economy remains structurally strong. It retains key advantages: labor, capital, productivity, global influence, and natural resources. The trajectory of these outflows depends largely on US policy decisions. The changes extend beyond goods trade and are impacting services, capital flows, and institutional trust.

Do you still think Trump’s tariff approach is a risk? What’s your view on US-China trade now?

The Trump administration often sends contradictory signals because it’s balancing competing internal factions. One wing, including tech leaders like Musk and Thiel, is globalist and anti-tariff. Another is more nationalist and favors protectionism, traditional values, reduced immigration, and stronger trade unions. A third group follows old-school conservative principles, concerned with debt and favoring private enterprise.

These factions push conflicting policies: pro and anti-union, pro and anti-tariff, strong dollar and weak dollar. Trump channels a mix of grievances that lack ideological coherence, but share a common goal which is to remake America, which requires reshaping the global order.

This remaking includes pressuring other countries to change how they save, spend, and invest. The endgame is a more centralized presidential system with fewer institutional checks. In this environment, trade agreements become volatile, and tariffs are applied unpredictably, varying across sectors and nations.

Earlier this year, I expected tariffs to rise moderately, say from 3 percent to 7 or 8 percent, which wouldn't be too disruptive. But what we’re now seeing could amount to over 30 percent, which would be disastrous. My base case now is tariffs settling around 15 to 20 percent, still inflationary and disruptive, but not world-breaking.

The US-China dynamic is uniquely geopolitical. Relations haven’t been “normal” since Obama’s second term and will likely remain adversarial beyond Trump 2.0. The decoupling from China will persist. Some countries may benefit, but they must be cautious not to become transshipment hubs for Chinese goods, or face US retaliation as seen with Vietnam, Mexico, and Malaysia. Beneficiaries must add real value to avoid being targeted.

With tariffs likely rising from 3 percent to 10 or 15 percent, potentially inflationary, where do you expect interest rates to go this year?

That’s why central banks, including the Fed, are now “data dependent”, which really means they don’t know what to do. They’re reacting to past data because uncertainty is high. If global tariffs rise to levels not seen since the 1930s, we’re entering a structurally different environment. It’s not just about goods, it’s about geopolitics and fractured global alliances.

There’s growing rifts between the US and traditional allies like Canada and Europe. The global order that relied on the US providing public goods, like security and trade stability is fading. As that breaks down, countries are turning inward. Services are already affected; US firms like JPMorgan are losing business in Europe. There’s growing backlash against US tech and culture, like China restricting Hollywood films.

This shift is leading to capital fragmentation. Wealth funds and large pensions are prioritizing local investments over global returns, as global capital flows become less reliable. The result: rising volatility, not just in goods, but in services, capital, and savings-investment imbalances.

Since the 1980s, the US has been the world's consumer, while countries like Germany, Japan, and China were savers. Reversing that is difficult. Historical attempts like the Plaza Accord triggered major market disruptions. So, this transition will bring long-term volatility, not just in tariffs, but in capital and inflation dynamics.

So does this mean we’re entering a higher inflation era, and therefore higher global interest rates?

Not necessarily. Some countries may face high inflation, others may deal with stagflation, and some, like China, could see deep disinflation. If China can't export, it may dump goods domestically or to alternative markets, prompting other countries to erect their own trade barriers. This leads to a “everyone-versus-everyone” dynamic, not just the US versus the world.

The Fed traditionally sets the tone for global rates. Is that changing now?

US is the only country amongst developed countries that can hit labor capital and grow multi-factor productivity all at the same time. US had strong institutional pillars. They had a very deep pool of liquidity. There is no capital control. They were running current account deficits, which would imply that there was a demand for US assets, but also there was supply of US dollar on a global basis.

And that is why US was exceptional. And that's why US dollar, as well as Federal Reserve, were setting agenda for the world. Now that's changing. But while US exceptionalism may be eroding, its reserve currency status remains unchallenged.

No alternative whether the euro, yen, or yuan can replace the dollar anytime soon. The dollar still dominates: over 50 percent of global trade, 57 percent of FX reserves, 80 percent of FX trading, 70 percent of cross-border lending.

So while the perception of US risk is rising, and volatility across trade and capital flows is increasing, the dollar remains dominant. We’re entering a world of higher uncertainty and risk, but not necessarily one of universally higher inflation or interest rates.

How do you see the rise of gold in this environment, given its recent strength?

Gold is the ultimate insurance policy. It doesn’t produce returns or serve as a currency, but when global risks rise, whether due to geopolitical tensions, climate disruption, deglobalization, or pandemics, gold becomes more attractive. It no longer correlates meaningfully with interest rates or other traditional metrics, and while it won't replace the US dollar or function as a medium of exchange, it offers protection in times of deep uncertainty.

Some people look to digital currencies for similar protection, but they behave more like equities and lack gold’s defensive characteristics.

Do you think foreign fund flows into India will start shifting from broad EM pools to more India-dedicated channels?

Yes, that shift is already happening. Just as Japan eventually emerged as an independent asset class, I believe India is following a similar path. Instead of being lumped into emerging market allocations, India is attracting dedicated attention, whether through standalone India funds, global portfolios, or sector-specific strategies.

This shift means deeper analysis, more investor trips, and broader coverage beyond large-cap names. Foreign investors are increasingly engaging with India’s fixed income and equity markets at a granular level.

Why is this happening? Like the US, India combines rising labor participation, access to capital, and productivity growth, something many other large economies like Europe, the UK, Canada, China, or Japan cannot replicate right now.

Geopolitically, India is well positioned: “too big to be small, too small to be big.” It can’t fully align with any single global bloc, but it’s large enough to benefit from global realignments.

India continues to invest capital efficiently. It still lacks adequate capital, which is why incremental capital-output ratios are healthy and corporate return on equity remains globally competitive. Structurally, India is sound.

But like the US, its biggest vulnerabilities are institutional and social. The economy is strong, but challenges like inequality, poor infrastructure, and governance issues could pose risks over time. As long as these are managed, India should continue to benefit from structural tailwinds over the next 5–10 years. This is why global investors are increasingly treating India as a standalone opportunity rather than an EM subset.

What’s your view on China equities, especially in light of past stimulus expectations and ongoing US-China tensions?

Structurally, China faces deep challenges, much like Japan in the 1990s. After keeping national saving rates around 45 percent for over two decades, China has overcapitalized, overbuilding in real estate, infrastructure, and financial markets.

The numbers are staggering. In 2005, China had $4 trillion in fully depreciated assets compared to India’s $1 trillion. Today, China is at $100 trillion, while India is around $8 trillion. That rapid capital infusion led to misallocation, and now China appears stuck in a liquidity trap, not a lack of money supply, but a lack of demand for credit.

Symptoms are evident: ballooning leverage, exploding banking assets, falling corporate returns, and high incremental capital-output ratios. Addressing these requires restructuring, lowering savings rates, redistributing funds from central to provincial governments, strengthening the social safety net, and boosting agricultural productivity. But such steps reduce state control, which China is reluctant to do.

Stimulus won’t fix this. In fact, more traditional stimulus could worsen the long-term outlook. So while China’s equity risk premium is around 7–7.5 percent (compared to 3.5 percent in the US), and short-term trades may rally, the long-term structural story remains weak.

And what about US tech stocks and the so-called Magnificent Seven?

There’s too much obsession with tech. “Magnificent Seven” as a label doesn’t really hold anymore, everything revolves around tech now.

What sets the US apart is its unmatched ability to translate inventiveness into innovation. But there are risks here too. If the government keeps cutting funding to research institutions and higher education, previously over half of all fundamental research came from public sources, that innovation edge could erode.

Additionally, if US foreign policy isolates tech firms from global markets, they may struggle to scale as efficiently. America still leads in tech and innovation, but policy missteps could undermine that lead over time.

After the recent terror strike in India, how are investors viewing the political risks here?

The greater concern isn’t isolated terror incidents, it’s the imbalance in India’s domestic economy. When multimillion-dollar apartments in Mumbai sell instantly but nearby neighborhoods lack basic plumbing, that signals a problem.

There’s a vast rural-urban divide. Hundreds of millions depend on low-productivity agriculture, many without education or skills for other work. Deep disparities exist across regions, cultures, and income levels, mirroring the US, where geographic and cultural polarization has led to dramatic outcomes.

India will need serious social investment: better infrastructure, education, agricultural reform, and water management, especially as monsoons grow more erratic. These aren't just governance issues; they’re productivity issues too.

Emerging markets often build strong export sectors, but their domestic economies struggle due to political interference, corruption, and low productivity in sectors like retail, construction, utilities, and agriculture. India's domestic productivity is just 10–15 percent of the US level.

If India aims for 8 percent growth, it must do one of three things: dramatically increase public sector investment (since the private sector saves more than it spends), improve productivity in domestic non-tradables, or further enhance capital efficiency.

Failure to act will trap India in a lower growth trajectory, limiting middle-class expansion and increasing polarization, across regions, religions, cities vs. villages, just like in the US. That’s why I often group India and the US together: structurally capable of outperforming both EM and DM peers, but with deep-seated institutional and social challenges that need to be addressed.

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