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Informist, Monday, Jan. 13, 2025

MUMBAI – In its investment outlook for Jan-Mar, DBS Bank said it is underweight on bonds of emerging markets and has allocated only 5% of its portfolio to the asset class. Among the fixed income instruments, Senior Investment Strategist Daryl Ho expressed particular caution on India's government bonds.

"In emerging markets as a whole, we are quite underweight...because I think when the dollar is strong, the knee-jerk reaction is definitely to see flows come out of emerging markets," Ho said.

In the case of India, the negatives extend beyond the currency weakness. These include the recent slowdown in India's growth, which the government estimates will fall to a four-year low of 6.4% in 2024-25 (Apr-Mar), and a potential slack in the government's revenues. This is in contrast to peers such as Indonesia, which could see better corporate earnings, income from minerals, and benefit from investors' 'China+1' strategies, DBS Bank's strategists said.

"Even though for onshore Indian bonds, absolute yields might be a bit higher, the drawback is that you are exposed to currency risks, which right now, with the dollar strengthening environment, looks a little bit challenging for emerging market currencies," Ho said. The rupee fell to a record low of 86.5900 a dollar on Monday. This did not change DBS Bank's outlook for index related FPI inflows, he said, which were earlier around $40 billion.

The same constraints also apply to the outlook on India's equity market. Strategists said foreign investors may give India's stocks a miss as growth takes a hit, along with the stretched valuations. Moreover, DBS Bank wants more clarity on the rate decisions of the Reserve Bank of India's Monetary Policy Committee.

With the US Federal Reserve reconsidering rate cuts, the strategists said the domestic rate-setting panel's rate cut may also be delayed despite the slowing growth, and they await the first rate cut before being positive on India. In December, the Federal Open Market Committee revised its forecast for the quantum of interest rate cuts in 2025 in half to 50 basis points. After recent data, futures market pricing has fallen to around 30 bps of US rate cuts.

Still, Joanne Goh, senior investment strategist, said India's equities are more sheltered from external factors. This is due to its lower correlation to the dollar, and also from US President-elect Donald Trump's proposed policies on tariffs, which single out China.

"But against this backdrop, fundamentals in some of the key companies haven't really changed," Goh said. "Digitalisation is still ongoing, consumerism is still ongoing, and in terms of financialisation, it's still ongoing."

Emerging markets are under constraints due to the strong US dollar and high interest rates in the US, the DBS Bank strategists said. Their favourite trades in Jan-Mar include a 'barbell' strategy of defensive assets like gold, along with high risk bets. US equities take up nearly a third of the recommended tactical asset allocation.  End

US$1 = INR 86.57

Reported by Cassandra Carvalho and Aaryan Khanna

Edited by Ashish Shirke

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