In my first piece, I wrote about the Great Reset and the likely Re-balance of global portfolios. A re-balance of geo-politics. A re-balance of military and security dependence. A re-balance of Trust. A re-balance of Trade and thus a re-balance of Investments.
This was of course in relation to the election of Donald Trump as the President of the United States of America and that his view of the world and his policies will fundamentally reshape global geo-politics, global relations and the global world of investing.
I am not debating whether the US stance and policies are right or wrong.
However, the fact that the Europeans and the NATO (North Atlantic Treaty Organisation) see the US-Europe security relationship differently than what has been the case since the end of World War II suggests it is not status-quo.
Or that Canadians view the relationship across the border with much trepidation and we have read reports of Canadians looking to sell their real estate that they own in US.
And despite, the seeming truce on trade and tariffs, China is likely to de-couple as much as possible from its dependence on the US consumer.
Global investing is thus dependent on global geo-politics and globally accepted behavior.
Russia is a classic example. Global investors were heavily invested in Russia. It was of course the “R” in ‘ BRIC” – the fancy dreamed up by Goldman Sachs in 2003 on Brazil, Russia, India and China being the leading economies and investment destination. However, as Vladimir Putin began acting on his dream of Russia going back to becoming the Soviet Empire with the invasion of Georgia in 2008, the annexation of Crimea in 2014 and the war in Ukraine in 2022, global investors and corporations had to take losses and exit.
Many investors have also debated over the last 5 years whether ‘China is Investable’. Global Corporations and Investors have poured in billion of dollars into China over the last three decades. However, China’s behavior in the global arena and its lack of generally accepted ‘rule of law’ has caused investors to either exit their Chinese investments or increase the ‘risk premia’ while investing in China thus leading to lower returns.
There are a few more such examples.
Global investors and corporations have thus learnt the hard way by ignoring the real risk of global accepted rules of behavior and focusing only on market opportunity and return.
Trump’s tantrums as I headlined my earlier article, may have similarly upended the global world in terms of looking at ‘real’ risks of geopolitics and questioning the generally accepted rules of global behavior even while investing into the US.
We are focused on the global investing landscape and I had noted that the ‘US exceptionalism’ is most represented in the ownership of its financial assets by non-US investors.
To recap, foreign investors, as of June 2024, owned US$31 trillion of US equities and bonds. If we add private assets and ownership of real estate / infrastructure, I estimated that number to be ~US$40 trillion.
The US is ~15% of global GDP. However, the US equity markets are ~50% share of global market capitalization. US equities now make >60% of weightage in the MSCI All country world Index (ACWI) as compared to ~40% in the decade of 2000s.
For most global investors, outside of their home market, US thus would be a large share of their overall allocation.
I believe this is about to change. It will be driven by geo-politics. It would also be a response to a concerted effort by the US administration to favor ‘main street – small business and individuals’ over ‘wall-street – financial markets’.
Even if global investors reduce their US investments by 10%, it is a US$ 4 trillion of potential outflows out of the US.
The outflows are not that visible however, the US dollar depreciation against major currencies does reflect some aspect of outflows and or higher hedging demand by foreign investors on their US investments.
I also noted that a large part of these outflow will head back to the respective home country.
However, my argument is, even if 5% of that US$ 4 trillion comes to India, that is US $200 billion in incremental flows into the India economy and Indian markets.
India has a large absorptive market and is a ‘friendly’ country
India gets less than 2.5% of GDP annually in foreign capital inflows8. This is across Foreign Direct Investments (FDI), Portfolio flows and External Commercial Borrowings by the Corporate sector. At this stage of its development journey, India should be attracting at least 5% of GDP from foreign flows. This would amount to US$200 billion in annual foreign flows into India – 5% of current US$4 trillion GDP9.
Even if split equally into public and private markets, the India opportunity is large enough to absorb the flows. A US$100 billion annual flow as FDI into Private Equity (PE), Venture Capital (VC), Infrastructure and Real Estate (RE) in a growing US$4 trillion economy seems trivial.
A similar US$100 billion flow into Indian Public Equity Markets (~US$4 trillion market capitalisation10) and Indian Bond market (~USD 2.5 trillion outstanding11) suggests there is the ability and the capacity to be easily absorbed.
Not many countries can absorb such amounts of foreign capital from a size perspective.
Also, India is amongst the few ‘friendly’ destination country for most other nations in the world.
As the world re-aligns to a higher tariff environment for China, India should see some benefits as US corporations look to diversify away from China.
Apple, for instance, had announced that the entire US iphone sales would be met from the Indian assembled operation. We should expect more such announcements from other corporations.
The recent India-Pakistan conflict may push back some of these strategic changes. India hasn’t been involved in a live war situation since 1999. Even that was fought on the border with no major impact in the cities. Modern warfare over drones and missiles has indeed changed the nature of a conflict.
Although, the situation has normalised, it couldn’t have come at a worse time for India. A lot of long-term strategic re-allocation to India, be it from financial investors or from corporations will be put under review.
Note: The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educative purposes only.
Arvind Chari is a Chief Investment Strategist and has been with Quantum Advisors India group since 2004. Arvind has over 20 years of experience in long-term India investing across asset classes. Arvind is a thought leader and guides global investors on their India allocation.
The views and opinions expressed in this article are his personal views.
You can follow Arvind on LinkedIN: https://www.linkedin.com/in/arvind-chari-879200aa/
His X handle is: @arrychary