The market is more likely to melt up than melt down: Stephen Dover

Monetary easing, strong earnings, and capital investment will drive markets higher, with India and other emerging markets set to benefit, says Dover

Monetary easing, robust earnings, and rising capital investment will fire up market momentum, says Stephen Dover, chief market strategist and head of Franklin Templeton Institute. In an interview with Samie Modak and Sundar Sethuraman in Mumbai, Dover — a value investor — observed that while losing money is a risk, missing out on potential gains can be costlier. Edited excerpts: 

Global markets have done exceptionally well this year despite trade war and geopolitical concerns. What has underpinned these gains? 

Primarily earnings, especially from the Magnificent 7 stocks. Over time, equity markets follow earnings, and this year we’ve seen an unprecedented profit surge from these tech giants. 

We’re also in a global monetary easing phase. Central banks are cutting interest rates after prolonged tightening. Historically, when central banks have reversed course — seven times in the past 50 years — markets have risen 100 per cent of the time one year later, creating a strong “risk-on” environment. 

Besides monetary policy, what other tailwinds are driving the market? 

Monetary policy is a key positive. Inflation isn’t fully under control, and while central banks could hold rates steady, they are likely to cut further. That will support markets — potentially risky long term, but helpful in the short term. 

The second tailwind is the earnings cycle. Companies aren’t just making profits; they’re reinvesting heavily. US corporates alone are spending about $400 billion on capital expenditure this year, driving broader economic growth. With the US economy roughly 70 per cent consumption and 12 per cent capital spending, this adds 2–3 percentage points to gross domestic product growth — funded from profits, not debt. 

Tax reforms also encourage investment by allowing full expensing of capital costs immediately. Consumer tax refunds ahead of next year’s midterms will further lift spending. 

You’re usually cautious as a value manager. Why the optimism now? 

True, I’m not usually bullish. But monetary easing, strong earnings, and rising capital investment create clear tailwinds. Taken together, the market is more likely to melt up than melt down.

 

Investors should also rethink risk: staying out of the market during a rally can be as costly as losing money.

 

How should investors position themselves? 

Gradually. Invest consistently, particularly in long-term growth markets like India. Pullbacks or a 10 per cent correction are opportunities to invest more, not less. Cash on the sidelines is high, which helps markets as investors are ready to re-enter on dips.

 

Key investment themes for the coming year? 

Three themes: First, the rally should broaden beyond the Magnificent 7 into industrials and other sectors. Second, the yield curve is likely to steepen as rate cuts take hold — long-term yields may remain higher while short-term rates fall. Third, the dollar may weaken structurally, benefiting emerging markets (EMs).

 

Your view of the yield curve? 

The US 10-year yield may remain above 4 per cent, possibly 4–4.5 per cent. We could see three 25-basis-point cuts by mid-2026, steepening the curve. Investors in cash should gradually extend duration into longer-term bonds. We’re not yet aggressively bullish on duration, but that could shift next year.

 

How does this affect EMs? 

Monetary easing, a steepening yield curve, and a weaker dollar are positive for EMs.

 

We’re constructive on EM debt — both dollar-denominated and local currency. For equities, we favour Southeast Asia, Latin America (LatAm), and India. Southeast Asia benefits from supply chains leaving China, India will benefit over time, and LatAm has managed inflation and fiscal policies better than expected.

 

China remains risky due to geopolitical issues. From a Western perspective, returns there must be extraordinary to justify the risk.

 

India specifically — are high tariffs a concern? 

India remains a core long-term investment destination. Foreign investors understand the story over a multi-year horizon. Short-term, valuations have risen and markets got ahead of themselves. Tariffs are more puzzling than damaging, and I expect US-India tariff issues to be resolved.

 

Gold — how do you view it? 

Gold doesn’t generate cash flow, making valuation tricky. Its recent rise is driven by central bank purchases, particularly Russia and China, as a dollar hedge. It’s not signalling inflation or acting as a refuge; movement is largely momentum and supply-demand driven. Trade tariffs and London arbitrage also affect it. Some allocation makes sense for diversification, but it’s no longer a perfect hedge.

 

Message to long-term investors? 

Markets are priced for perfection. A 10 per cent correction over the next six months is possible — a buying opportunity. Historically, after rate cuts, markets often correct before resuming an uptrend. Investors should stay invested, diversified, and patient. Short-term volatility is temporary; long-term fundamentals, especially in EMs like India, remain strong. 

Seizing the upside

 

Profit powerhouses

Tech giants lead earnings; reinvestment drives growth

 

Policy tailwinds

Rate cuts spark short-term market momentum

 

Emerging market wins

India, Southeast Asia, and LatAm positioned to benefit; caution on China

 

Smart moves

Invest steadily; corrections are buying opportunities

 

Enduring fundamentals

Volatility is temporary; long-term outlook remains strong