The Impact of US Equity Flows on Emerging Markets
Recently, we have been witnessing continuous outflows from emerging markets, including India, while the US market has been experiencing strong inflows. One of the primary reasons for this shift is the surge in equity ETF inflows into the US market since election day. If we look at the data, this trend is similar to what happened post-COVID when massive liquidity pushed US equities higher. The current rally is being fueled by strong inflows, leading to a natural exit from other markets as investors chase returns.
US Market Outperforming in Dollar Terms
Over the past year, Indian equities have delivered nearly zero returns in US dollar terms, whereas the S&P 500 has gained approximately 28-30%. This stark difference in performance makes US stocks more attractive for short-term investors and fund managers, leading them to reallocate funds away from emerging markets. The strong dollar further amplifies this trend, as global investors prefer to stay invested in the US market rather than take currency risks in markets where returns are not keeping pace.
Will This Liquidity Trend Reverse?
It is important to note that similar liquidity surges have happened before. During the post-COVID market rally, US inflows spiked significantly, but eventually, they stabilized, and the capital flow became more balanced again. A similar pattern may play out this time as well. If US markets reach a point where valuations become stretched or economic factors change, these heavy inflows could slow down, and money may start flowing back into other regions, including India.
What This Means for Indian Markets
For Indian equities, the current phase of outflows may not last forever. If the liquidity-driven trend in the US slows down, outflows from India could reduce or even reverse. Typically, such cycles create short-term pressure, but once the trend shifts, markets tend to recover strongly. Investors should focus on the long-term potential rather than reacting to short-term liquidity movements.
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