I don't think it is time to start buying Indian stocks: Louis-Vincent Gave

It has mostly been a one-way street for the Indian markets since October 2024. Hong Kong-based LOUIS-VINCENT GAVE, cofounder of Gavekal Research, which manages around $2.4 billion in assets, tells Puneet Wadhwa in a conversation in New Delhi that investors may need to wait out the next six to eight months before sentiment and valuations find a more balanced footing. Edited excerpts:

 

What’s your interpretation of Donald Trump’s statement to Congress?

 

Trump’s speech was raw and filled with contradictions, which is quite typical of him. I believe his primary goal is to lower bond yields. The US is facing an unprecedented amount of corporate debt rolling over in the next few years. Since many companies issued debt at low interest rates, a rise in yields would burden them with higher refinancing costs. To prevent a slowdown in the economy, Trump’s goal is to bring yields down, which would also ease the strain on corporate debt.

 

 

Overall, the speech focused on managing the economy by reducing bond yields, controlling oil prices, and addressing the strong US dollar. While his rhetoric often appears contradictory, the goal seems to be economic stability, especially in light of the upcoming debt rollovers. From what I see, the way Trump is using tariffs, they appear to be more of a negotiating tool.

 

What are your views on the Indian markets?

 

The recent correction in Indian markets has been significant, but it’s important to put it in perspective. This downturn has been tough, but it’s not a disaster. The big bull market of the past six to seven years was driven primarily by two key buyers: Indian retail investors, who provided consistent local inflows, and foreign investors, particularly emerging market (EM) funds, who saw India as one of the only investable options while other EMs like Russia, China, and Latin America (LatAm) faced challenges.

 

The problem was that India’s valuations were high, even though its growth story, demographics, and infrastructure improvements remained strong. However, in the past six months, with China’s outlook improving, foreign investors have shifted their focus away from India, leading to heavy outflows despite continued retail buying.

 

Will foreigners keep selling India in favour of China?

 

Well, that might continue for the next two to three months. The bigger picture suggests that as China, LatAm, and other EMs start to outperform, the overall allocation to EMs — after years of shrinking — will begin to grow again.

 

India’s share of that allocation may remain steady, but as the overall pie expands, foreign flows should return to India, possibly in the fourth quarter of 2025. In the short term, India might face some continued pressure, but the structural story remains intact within the EM pack. China is a cyclical story, Brazil is a valuation story, and India is a structural story.

 

What’s the sense you’re getting from your foreign investors about India?

 

We have a diversified client base now. Among our EM-focused investors, who manage emerging market funds, they are very overweight in India. However, for global fund managers, especially those in New York, India isn’t a major focus, as EMs haven’t been a key concern for them.

 

Do you expect any policy response from the government, say cutting the capital gains tax for foreigners?

 

A tax cut, especially on capital gains for foreign investors, would send a strong pro-investment signal and likely attract significant inflows. History has shown that when a country’s leadership takes clear steps toward fostering growth and investment, foreign capital responds positively — just look at Argentina’s recent experience.

 

If Narendra Modi were to reinforce this message by cutting or abolishing the capital gains tax for foreigners, it would likely strengthen confidence and encourage further foreign participation. The appetite is certainly there — foreign investors would be more than willing to engage if they see a government that is actively working to make India an even more favourable place to deploy capital.

 

Tepid corporate earnings, slowing economic growth, and expensive valuations. It seems the Indian markets are running purely on liquidity and fumes.

 

The biggest issue plaguing Indian markets right now is valuation. The economy itself is not fundamentally broken — there's no aggressive monetary tightening from the Reserve Bank of India or any major shock that could send the economy into a tailspin. The concern is that Indian equities are priced expensively relative to other EMs, which makes them less attractive to foreign investors in the short term.

 

That said, if the broader EM pie expands — as it likely will if US bond yields come down and the dollar weakens — India will inevitably get its share of inflows. Even if foreign investors don’t rush in immediately, they may at least stop selling, which in itself would be a stabilising factor.

 

Will the domestic investors/flows hold up?

 

Yes, the bigger question is whether Indian retail investors continue to have faith in their equity markets. Domestic flows have been a major driver of the market, and if sentiment starts to sour further after six tough months — potentially followed by another three months of struggle — there could be a more serious issue.

 

That said, Indian equities aren't in a bubble; valuations are high, but not irrationally so. The market is expensive, but not at an extreme. If earnings growth holds up, even if prices stagnate for a year, it could be a necessary pause before the next leg up. Investors may just need to wait out the next six to eight months before sentiment and valuations find a more balanced footing.

 

Is this the time to start buying?

 

I don’t think it’s time to start buying Indian stocks. I would start doing so in the fourth quarter of this year. For the emerging markets today, I would load up on Brazil and China, and on all these assets that have been beaten up. I think for now, we’re still in the phase where money comes out of India to go to these other markets that have better momentum and better valuations, and we’re still in that phase. I’m not bearish on India, and I am very clear on that front. Investing depends on one’s time horizon. If someone has a 10-year time horizon, buying now wouldn’t be a mistake. However, it will be a better entry point in the fourth quarter of this year because the flows from the large institutional clients into emerging markets will most likely come in the fourth quarter and the first quarter of next year. 

INDIA’S MARKET: RUNNING ON LIQUIDITY AND FUMES

 

*  Overpriced valuations: Indian stocks are costly versus other EMs

  *  Stable economy: No major shocks or RBI tightening

  *  Foreign pullback: High valuations deter foreign investment

  *  Potential rebound: Global EM growth could bring inflows back