Investor fears turn to profits after trading clouds clear

Agreements with the U.S. and European Union helped allay fears that geopolitics and tariff turbulence would continue to weigh on the $5.2 trillion market. However, this relief has done little to offset concerns about business fundamentals, especially after Indian stocks posted the worst returns among major global peers in January.Earnings growth has been lagging for months, the rupee has weakened and foreign investors have treated India as a funding source to chase artificial intelligence-driven rallies in China, Taiwan and South Korea. Adding to the gloom, Indian technology heavyweights such as Tata Consultancy Services Ltd. and Infosys Ltd. swept up in a global software sell-off as Anthropic’s latest AI advances threaten to disrupt traditional outsourcing business models.

“India will continue to be seen as a financing market, at least for the time being,” said Vivek Dhawan, fund manager at Candriam NV. “In terms of earnings growth recovery, we see weakness on the software services side.”

Earnings for the MSCI India Index are expected to grow by about 8.3% over the next year, lagging regional peers, according to Bloomberg data. That compares with forecast growth of about 16% for China, about 108% for South Korea and almost 30% for Taiwan.

The index trades at about 22 times forward earnings estimates, in line with its long-term average. However, compared to other emerging markets, India still trades at a premium.

Valuations are less attractive, “taking into account the growth trajectory and room for earnings recovery, which are likely to remain selective rather than broad-based,” said Ecaterina Bigos, Chief Investment Officer Asia ex-Japan, at BNP Paribas Asset Management at AXA IM. The balance sheet “points to cautious optimism on Indian equities, with a focus on strategic growth areas for now.”

The sentiment underlines one of the most challenging periods since India emerged as a favorite among global investors betting on the world’s fastest-growing major economy and its huge domestic market. Persistent geopolitical risks and periods of economic slowdown have blunted the appeal of Indian equities since early 2025.The result was India’s worst underperformance against emerging markets in decades last year. Foreign investors pulled a record $19 billion from local stocks even as economic growth outpaced rivals. Over the past 12 months, the MSCI India Index has risen 8%, with dollar returns eroded by rupee weakness. In contrast, the MSCI Emerging Markets Index is up almost 38%.

To be fair, there are signs of cautious improvement. Indian shares are on track for a second straight week of foreign inflows – a streak not seen since October.

“The tariffs hurt Indian exporters and, more importantly, hurt the rupee significantly,” said Ashish Chugh, head of global equity for emerging markets at Loomis, Sayles & Co. “That created a negative feedback loop: rupee weakness led to foreigners selling shares, which led to more rupee weakness. The trade deal breaks that spiral and, in my view, reverses it.”

US President Donald Trump has signed an executive order to eliminate a punitive 25% tariff on Indian goods imposed on the country’s purchases of Russian oil. A joint statement from both countries showed that a so-called “reciprocal” duty on Indian goods was also reduced from 25% to 18%.

The new tariff provides significant relief to Indian exporters after they were hit with a 50% tariff, one of the highest in Asia. The South Asian country also agreed to purchase $500 billion worth of American products over five years, including aircraft, graphics processing units and energy, while pledging to reduce non-tariff barriers for American companies.

The rupee now appears undervalued with India’s real effective exchange rate at almost a decade-low, Chugh said. He expects macroeconomic fundamentals to remain supportive, with earnings accelerating next year after a period of subdued earnings growth.

More optimistic investors argue that the trade deals, combined with the recent state budget, could spark a big rally.

“Now is the time to buy India,” said James Thom, senior investment director of Asian equities at Aberdeen Investments, who said his Asia ex-Japan equity portfolio is consistently overweight India. “Quality companies are well positioned for the next cycle.”

Markets initially welcomed the tariffs, with the US cutting the duty on Indian goods from 25% to 18% – lower than for most Asian countries – while removing an additional 25% punitive duty on purchases of Russian oil. Indian shares rose the most in eight months after the US president announced the deal, with the rupee rising 1.1% against the dollar. However, the longer-term impact remains uncertain.

While the deal is a “confidence booster,” it does not necessarily change his view on GDP growth prospects over the next 12 months or on equity gains, said Sanjay Mookim, JPMorgan Chase & Co.’s India strategist. Friday in an interview with Bloomberg Television.