Conflict impact on markets limited but India lacks stronger drivers: Christy Tan, Franklin Templeton

Time of India

12-05-2025

The impact of the
India-Pakistan conflict
on the markets will be limited, said
Christy Tan
, MD and Investment Strategist-APAC,
Franklin Templeton
Institute. In an interview with Nishanth Vasudevan, Singapore-based Tan spoke about her views on India, China and investing in equities among other topics. Edited Excerpts:
What is your assessment of the impact of the India-Pakistan conflict on
Indian markets
?
Given current assessments, we think the impact on Indian assets will be limited, as a full-blown war remains unlikely. The US, EU, UN, China, and Russia have responded, and most have actively facilitated dialogues and de-escalation efforts.
Beyond the tensions, how are you evaluating India as an investment destination?
For the Indian equity markets to go from strength to strength, there have to be stronger drivers. And that could be something that is missing. And if you accompany that with rich valuations, then that could set the stage for the upside prospects to be quite limited. So, there's a need to be really selective, increasingly so now than previously. That is the formula to get more returns out of Indian assets.
Globally, the optimism in the markets seems to be back. Is it some that's here to stay, or is it just the calm before the storm?
The market is probably shifting from that sentiment-driven tone to a more fundamentally driven one after Donald Trump's more conciliatory stance towards tariffs and deals. So, we might still, along the way, be experiencing some volatility because markets are still very sensitive and very reactive to what Trump says. And there is no prediction as to what he would say that could put markets in a tailspin anyway.
But, at the end of the day, we are looking at a reduced level of uncertainty because we are moving nearer towards potentially the announcement of some trade deals with some countries. Markets could potentially switch to more fundamentals.
Did you see a recession in the US?
The base case is still that the US would be able to avoid or escape a recession, given that it is, after all, a more services-driven economy. There's not a large amount of pressure in the financial sector or in the real economy sectors. But we will see default rates start to increase. We'll see delinquencies start to increase. And this is coming up from a very low point-well below the 25-year average. So, is that sufficient to push the economy into a recession? Perhaps not.
The one question that everyone has is how and where to invest when there's so much policy uncertainty?
We have been prioritising diversification because the geopolitical situation hasn't abated. You still need to build a more resilient portfolio. If you think that equities are too risky, a good substitute could be high-yield credit. Over the years, ever since the pandemic, the quality of this high-yield credit has improved. And the companies that were able to withstand the high cost of financing from the Fed's rate hikes continue to be able to weather all this, and spreads have tightened so much. Even though they've widened recently, they're still also within manageable levels. A lot of people think gold and crypto probably are safe havens. That is arguable. It should be thoughtful diversification and looking at risk-reward in a manner where you really comb through the whole fixed income spectrum. It's not just about the 60-40 portfolio within the two main assets (equity and debt).
What about equities?
There are some signals that we follow that have shown the stock market tends to bottom up and return like 14-15% a year later. So, don't wait for volatility to come off. If you wait until volatility comes off- like if VIX goes from 40 to 20-you would have missed that front part of the rally, because markets tend to bottom before that. And, don't wait until the recession gets announced, because finally, when the recession gets announced, that is when the markets start to go up.
Do you see some kind of rotation of long-term capital from the US to emerging markets?
In the short term, the US has lost its exceptionalism. However, we will probably not yet see a huge, significant reversal of flows from the US. I think a large part of that rotation is within the US, from perhaps equities to fixed income. In the past, you could have the stock market falling, but the dollar increased. Now the risk is a trifecta of falling stocks, rising bond yields, and a falling dollar. So that trifecta of risk will be quite instrumental in getting investors basically to reassess their portfolios and really shift out of the US But that need not be the emerging market. That could be in Europe. It looks attractive. Investors have been super confused about China.
What is your take?
Valuation in China could look cheap, but it could be cheaper. The only thing about valuation is whether there is something to look forward to. It's either fiscal and monetary policies or the right combination. Markets will have to tame their expectations of what Chinese policymakers will do, because Chinese policymakers will not do a bazooka. There are good reasons for that.