'Tariff trade' narrative seems to have run its course, says Elara Capital

In the US, foreign-domiciled funds withdrew $10 billion from effectively reversing inflows seen in April, as per Elara Capital

Domestic brokerage Elara Capital believes that the "tariff trade" has been in play for the past six months and now appears to have run its course with the recent market capitulation. Also, further significant market damage from this narrative seems unlikely.

 

Market capitulation refers to an extreme point of panic selling, where investors are willing to sell their assets at any price, resulting in a rapid decline in prices.

 

Looming fears around the US tariffs heightened volatility across global markets and amid the uncertainty, foreign investors pulled money from nearly all regions, with the exception of Mexico and Hong Kong, according to the Elara Capital note.

 

However, the magnitude of outflows remained modest, as investors are still uncertain about the outlook. In most regions, the weekly outflows were broadly in line with the previous two weeks' inflows.

 

In the US, foreign-domiciled funds withdrew $10 billion from effectively reversing inflows seen in April. Similarly, Japan saw $424 million in outflows following $630 million inflows during the prior two weeks, the report stated. As per data compiled by Bloomberg, in the past two weeks, among the emerging markets, FIIs sold equities worth $2,939.3 million in India, and $488.1 in Indonesia.

 

However, Taiwan and South Korea were the only markets where FII redemptions have continued for the past 5–6 weeks.

 

In the month-to-date (M-T-D) period, Taiwan saw incremental outflows of $68.6 million and South Korea saw outflows of $6,357.2 million.

 

Besides, a sharp expansion in domestic flows was seen in the US and China. US markets saw a 16-week large inflow of $37.6 billion from domestic investors. Similarly, Chinese markets saw a six-month large inflow of $27 billion from domestic investors.

FII outflow

Foreign institutional investors (FIIs) outflow in the emerging markets began in October 2024 following US President Donald Trump’s victory, driven by concerns over US tariffs which persisted for about five months, ending around February 2025.

 

However, a few weeks before the official tariff announcement on April 3, 2025, a stabilisation was seen in the flows, which reversed again after the event.

 

Back home, India dedicated funds pulled out $352 million this week after inflows of $506 million in the prior two-weeks before the event. Total outflow from India of $603 million was at a 12-week high because of bigger redemption from GEM and AXJ funds.

 

Global Junk bonds saw the largest redemption since Covid of $20 billion.

 

In April, Indian benchmark indices Nifty50 and Sensex gained 0.61 per cent and 0.93 per cent respectively. However, since October, the Sensex has lost 8.9 per cent and Nifty50 has slipped 9.6 per cent.

Will FIIs return to India?

VK Vijayakumar, chief investment strategist at Geojit Investments Limited reckons that a clear pattern in foreign portfolio investors (FPIs) strategy will emerge only after the ongoing chaos dies down.

 

"In the medium-term FIIs are likely to turn buyers in India since both the US and China are heading for an inevitable slowdown as a result of the ongoing trade war, " said  Vijayakumar.

 

He added: Even in an unfavourable global scenario India can grow by 6 per cent in FY26. This, along with better earnings growth expected in FY26, can attract FPI investments into India once the dust in the market settles down.

 

Independent market analyst Ambareesh Baliga believes uncertainty around US tariffs could give an edge to India.

 

"Typically in the market, global investors look at economies which are more stable and are outperforming. And in that, India would emerge as one," said Baliga.