However, the narrative is shifting. After a strong start to 2025, US equity markets have hit turbulent waters. Tariff concerns loom large as President Donald Trump imposes fresh trade barriers and threatens more, with no clear resolution in sight.
Consumer sentiment has been the biggest casualty of this uncertainty, with surveys showing a sharp decline. In February, consumer confidence saw its steepest drop since August 2021. Notably, the expectations index—tracking short-term outlook on income, business, and jobs—fell below June 2024 levels. Meanwhile, 12-month inflation expectations surged from 5.2% to 6%.
Also read: FPI jitters: Are foreign investors losing confidence in Indian markets?
Despite market turbulence, core economic indicators remain relatively stable. A rebound could occur if either Trump eases tariffs (Trump Put) or the Fed steps in with rate cuts (Fed Put) to boost sentiment. However, ongoing policy uncertainty is already weighing on corporate and consumer spending, signalling an inevitable economic slowdown. Coupled with stretched valuations, US equities face a challenging outlook in the near term.
Europe’s big moment
On the other side of the Atlantic, major macro tailwinds are playing out for European equity markets, including interest rate cuts by European Central Bank (ECB), increased defence spending, removal of budgetary brakes by the German government, and the potential of the war ending in Ukraine.
Europe has unveiled a €800-billion plan aimed at boosting defence and security expenditure of the European continent to reduce dependency on the US. Germany has also relaxed its fiscal policy to support domestic industries, job creation, and economic growth. Both these steps are strong steps aimed at bolstering Europe’s economic activity.
Moreover, a steeper yield curve is boosting net interest margins (NIMs) for European banks. With fiscal policies turning more accommodative and earnings outlooks improving, Europe’s economic prospects look stronger than they have in decades.
Capital is swiftly shifting from the US to Europe, driven by diverging fiscal policies—tightening in the US versus expansion in Europe. Bloomberg ETF flow data confirms this trend, with investors pulling money from US equities and redirecting it to European markets.
Looking ahead, two scenarios could unfold. The optimistic view sees Europe and China accelerating to narrow the gap with the US, sustaining global growth even as the US slows. The pessimistic view warns of a broader downturn, with policy delays in Europe, China’s struggle to balance stimulus and reform, and a weakening US economy weighed down by job insecurity, fading consumer confidence, and tariff-driven stagflation.
What plays out from hereon depends a lot on global policy and politics, hence there is a strong need to diversify across geographies to build a robust allocation. Despite India’s strong domestic outlook in the long term, India will not be completely immune to a global slowdown and hence, markets might struggle to find upward direction.
Also read: What you need to know about RBI rules when investing abroad
How do Indian investors position their portfolios?
Indian investors should consider diversifying their portfolios globally through the Liberalised Remittance Scheme (LRS), which not only provides genuine diversification but also serves as a hedge against rupee depreciation.
Given the current macroeconomic environment, it is advisable to adopt an underweight stance on US equities, especially for those who have already invested in S&P 500 and Nasdaq feeder funds and are sitting on significant gains—booking partial profits would be a prudent move.
Instead, investors can explore European equities, which are benefiting from strong macro tailwinds. Exposure can be gained through European equity fund of funds or by directly investing in European exchange-traded funds (ETFs) via global brokerage platforms like Interactive Brokers, which offer low-cost access.
Additionally, investing in international equity remains tax-efficient, with long-term capital gains (LTCG) tax at just 12.5%, making it an attractive option for wealth preservation and growth.
Also read: Vivek Kaul: Is capital gains tax to blame for the exodus of foreign investors?
March presents a key window of opportunity, as Reserve Bank of India (RBI) data shows that Indians have already remitted $85 million for global investments and real estate purchases as of November 2024, marking a 100% year-on-year increase.
With capital shifting out of US markets and into Europe, Indian investors should act swiftly to rebalance their portfolios and mitigate risks from potential market slowdowns.
Prateek A Chaturvedi, head of Global Investments, Neo Wealth & Asset Management
