Indian Stocks Hold Ground Despite Global Slump, Record Outflows

India's stock market—hit by record foreign outflows—is struggling to extend the rally it saw in the first half of the year. However, there is a silver lining to it.

The buoyant domestic flows have kept the market flat in November when its Asian and European peers were hit by tariff threats of US President-elect Donald Trump, and escalating geopolitical tensions. The benchmark gauge—NSE Nifty 50—was down by 0.3% in November.

This was amid a foreign exodus that went on for a record 38 sessions. Global funds offloaded Rs 45,900 crore in November, while domestic investors mopped up nearly Rs 44,500 crore during this period.

Global uncertainties escalated last week after Trump announced that he would impose "an additional 10% tariff, above any additional tariffs" on China. He further vowed 25% tariffs on all products from Mexico and Canada.

"Global tensions are escalating, and the world economy is anticipated to decelerate due to high inflation and interest rates," Vinod Nair, head of research at Geojit Financial Services. Trump's potential policies are not solely driving the uncertainty, but they could be the biggest point of concern, he added.

On the geopolitical front, Israel reached a cease-fire deal with the Lebanese militant group Hezbollah in the last week of November. However, tensions between Russia and Ukraine peaked. President Vladimir Putin threatened to use new ballistic missiles to hit "decision-making centres" in the Ukrainian capital.

This threat came after Russia targeted Ukraine’s power system in a new air assault in retaliation to the recent Ukrainian attacks using the US and UK-made missiles.

Domestic institutional investors' resilience despite record outflows underscores the pivotal role of domestic flows in supporting the markets, said Saurabh Patwa, head of research and portfolio manager at Quest Investment Advisors. "However, their sustainability hinges on the robustness of the domestic economy."

Structurally, FPIs do not appear bearish on India, and it is believed that FPI inflows will return as global dynamics stabilise, Patwa added.

Trump's presidential triumph has supported the appetite for US assets as investors fear his plans will ignite global trade tensions.

Equity benchmarks in Asia and the European region traded with caution through the month.

The Philippine stock exchange—PSEi Philippine—was the worst performing Asian market in November with a decline of over 7%. Chinese stock market advanced 0.6% last month despite the country's stocks showing some momentum after the fiscal stimulus announced to revive the economy. That, however, failed to sustain for long.

Hong Kong's Hang Seng Index and South Korea's Kospi were down 5.8% and 3.4%, respectively, while the Japanese stocks were up marginally by 0.4%.

The currencies in the Asian country also took a toll with yen being the being the only currency to see gains against the greenback. The dollar index, which tracks the US dollar's performance against a basket of 10 leading global currencies, has risen by 2.3% since Trump's victory.

The party only got started on Wall Street led by the so-called 'Trump Trade' after the former president's swept the Nov. 5 election. US stock gauges kept hitting fresh records, and world's largest traded cryptocurrency Bitcoin inched closer towards the landmark $100,000-mark.

The dominance of US equities over the rest of the world is unlikely to abate unless geopolitical and trade policy risks fade, according to JPMorgan Chase & Co. strategists.

The S&P 500 has climbed 26% in 2024, making numerous record highs, while the MSCI World Ex-USA Index only returned 3.5%, according to Bloomberg. The valuation gap has also widened, with US stocks now trading at a record 60% premium to international peers based on forward price-to-earnings ratios, JPMorgan said.

With Trump's victory, there will be implications on world trade, noted Kunal Shah, senior research analyst at Carnelian Asset Management & Advisors. "However, we think it is neutral to positive for India considering Trump's relationship with India as seen in the past."

During the campaign trail, Trump had described India as "one of the biggest chargers of tariffs". However, unlike the 60% tariff he has promised on Chinese imports, Trump did not mention any specific action against India. A blanket import tariff in the range of 10% to 20% on all imports is part of his plans.

India has been in US crosshairs for their tariffs on select US goods, Haitong International Research Ltd. said in a report. "However, India will emerge largely unscathed from this particular event were it to materialise."

This might even bode well for some Indian sectors such as electronic goods, textiles and pharmaceuticals, the report said.

The recent prolonged 38-session selloff was mainly driven by 'sell India buy China' trade, according to Sraboni Haralalka, Co-Founder & Executive Director at Wodehouse Capital Advisors. "However, it seems that the theme has run its course. As India is not a part of the initial tariff strategy of Trump, we expect FII sell-off to eventually subside."