Global Capital Flight and Fiscal Measures Shake Emerging Markets
February 11, 2025
Strong fiscal initiatives, such as the Rs 1 lakh crore consumption boost through income tax cuts announced by Finance Minister Nirmala Sitharaman, were widely expected to propel market gains. Many believed that this bold measure, along with positive political developments like the recent Delhi election results, would send equity markets soaring. However, turbulent global events and vigorous domestic political posturing have increasingly overshadowed these positive signals.
despite efforts to stabilize the market, the disruptive influence of geopolitical tensions and policy shifts abroad is being felt at home. In the first 30 trading sessions of 2025,the much-discussed “ghar wapsi” campaign—an initiative characterized by global institutional investors repatriating capital—has contributed to a $10 billion outflow from key emerging market segments on Dalal Street. This phenomenon mirrors similar shifts in capital allocation observed around the world, including in U.S.markets during periods of heightened geopolitical uncertainty.
“Outflows are part of a broader EM (emerging markets) sell-off, but at 0.2% of market cap over the past month, India is the worst affected. Over the coming months though, further outflows can be expected: they are 0.1% of market cap over 12 months in India, vs 0.5-1.3% in other EMs. Further, uncertainty and UST yields remain high,”
Axis Capital’s Neelkanth Mishra
Mishra further noted that a sharp reduction in the global P/E premium—from 26% in September down to 5%—suggests that the market may have already absorbed a great deal of the negative sentiment. “India’s P/E-derating driven underperformance, offsetting gains in forward EPS, may be coming to an end. other major markets have re-rated, and expectations in India have been reset lower,” he added in a recent report. Such dynamics invite comparisons to shifts seen in U.S. market valuations during periods of economic recalibration.
Even though Foreign Institutional Investors (FIIs) have scaled down their exposure—from a peak holding of 20% during FY14-20 to 16% in 2024—robust domestic capital inflows have helped cushion the indices. Mutual fund participation is now at a 10-year high, providing a partial counterbalance to global capital flight. This domestic resilience offers valuable lessons for U.S.investors who have witnessed similar stabilizing inflows during periods of external market stress.
Amid these mixed signals, the impact of policy shifts in the U.S. is also evident. With the Trump governance rolling out aggressive initiatives under the banner of “America First,” market sentiment has shifted dramatically. Industry leaders are now observing a “quit emerging markets” movement among global investors, as capital increasingly gravitates back to the United States.
“We saw one of a large private equity fund going and meeting President Trump and saying that you had asked me to bring $100 billion, here I am bringing $500 billion. Clearly, America first policy and higher interest rates, as well as high bond yields is pushing capital back to America,”
Nilesh Shah of Kotak Mutual Fund
stock Market Strategy Amid Capital Outflow
Amid persistent geopolitical uncertainty and continued FII selling, market experts advise a diversified asset allocation strategy. Drawing parallels with diversified portfolios common among U.S. investors, advisors recommend supplementing equity exposure with tangible assets such as gold and silver, alongside conservative debt instruments. For example, gold ETFs have delivered returns of more than 9% over the past month, reflecting their growing appeal as safe-haven assets.
When selecting stocks, a bottom-up approach is proving to be more effective than broad basket buying. With equity indices like Nifty currently trading at 20 times the one-year forward P/E—at a 7% discount relative to the past five-year average—the market appears reasonably priced for selectively chosen large-cap stocks. This scenario recalls similar valuation strategies employed in U.S. blue-chip markets during periods of market correction.
“Given the fact that a significant amount of correction has happened in the indexes as well as the broader markets, this is the time to initiate fresh investments with a medium to longer term perspective,”
Joseph Thomas, Head of Research, Emkay Wealth Management
Further emphasizing the importance of quality over short-term momentum, Nilesh Shah warned, Stay away from low floating stock counters where we believe froth is still there despite hefty correction
. Shah sees promising opportunities in sectors that remain underexposed to unsecured lending, including midcap IT, private banks, and NBFCs. He also highlighted potential in safer sectors such as pharma, telecom, and consumer discretionary, which are drawing increased investor interest globally.
Frequently Asked Questions
- What fiscal measures were announced to boost market gains?
- Finance Minister Nirmala Sitharaman announced a Rs 1 lakh crore consumption boost through income tax cuts, measures that were widely expected to propel market gains.
- What is the “ghar wapsi” campaign mentioned in the article?
- The “ghar wapsi” campaign refers to the initiative of global institutional investors repatriating capital, which has contributed to a $10 billion outflow from key emerging market segments on Dalal Street.
- How have geopolitical tensions and overseas policy shifts influenced the market?
- Geopolitical tensions and policy shifts abroad have disrupted market stability, contributing to capital outflows and creating uncertainty, similar to dynamics seen in U.S. markets during periods of heightened geopolitical uncertainty.
- How have Foreign Institutional Investors’ (FIIs) exposure levels changed recently?
- FIIs have reduced their market exposure from a peak holding of 20% during FY14-20 to 16% in 2024, although robust domestic capital inflows have helped cushion the indices.
- What investment strategies are recommended amid persistent capital outflow?
- Market experts advise a diversified asset allocation strategy, which includes supplementing equity exposure with tangible assets like gold and silver, along with conservative debt instruments. A bottom-up approach to stock selection is also favored over broad basket buying.
- Why did global market sentiment begin to shift, prompting investors to move capital back to the united States?
- Global sentiment shifted as the aggressive “America First” initiatives under the Trump governance, combined with high bond yields and interest rates, pushed capital back to the United States, leading to a “quit emerging markets” movement.
- How has the global P/E premium changed recently, and what does this indicate?
- The global P/E premium fell sharply from 26% in September to 5%, suggesting that the market may have already absorbed much of the negative sentiment and recalibrated expectations, particularly in India.
- What lessons can U.S. investors learn from domestic resilience in emerging markets?
- Despite global capital flight pressures, domestic resilience—evidenced by mutual fund participation reaching a 10-year high—offers U.S. investors insights into managing market stress through stabilizing domestic inflows.
