Outside the US, Stephen Dover, chief market strategist at Franklin Templeton, is positive about Japan and emerging markets, including India.
Dover, who is also head of the Franklin Templeton Institute, highlighted that a trade deal between India and the US would further strengthen his case for diversifying into India. He explained that any clarification on the deal is likely to be positive for the markets, unless it’s severely negative, which he doesn’t expect. More importantly, he noted that it is in the long-term strategic interest of both countries to remain close partners.
“It’s unfortunate that there are some bumps in the relationship, but hopefully and likely that relationship will get back on track,” he added.
Q 1) In India, there’s been a lot of talk about US heading into a recession and how that could trigger a global slowdown that eventually spills over into the Indian economy. From your perspective, how real is that risk?
You know, there has been a prediction of a recession for the last five years, so we’ve had the greatest predicted recession that never happens, over and over again. The very broad outlook, not just ours, but that of almost all strategists, is that we will not have a recession next year, largely because of the massive stimulus that’s already in place.
So our view isn’t that a recession can’t happen, but that it’s unlikely. That said, assets like Bitcoin, which are highly leveraged and have been imploding, suggest there could be leverage risks in the system, usually where problems arise. The US Federal Reserve has room to cut rates if needed in a recession. With my experience as a value contrarian, when everyone agrees, I get sceptical. Recession may not be the right term; economic uncertainty fits better. Inflation could surprise on the upside, potentially causing stagflation. A shift in investor sentiment around AI could also hurt specific stocks, and given their size in the market, the impact could be significant.
There is also a lot of geopolitical and political uncertainty in the US. So this is a difficult time, there is a risk the market could fall, but there is also a risk it could keep bubbling higher. While you don’t want to be there when a bubble pops, you also need to participate in the upside, or you risk losing money overall.
Q 2) So how should investors approach a market like this?
That’s why we think diversification is so important, especially away from artificial intelligence (AI), and for global investors, [investing] outside US. This is why we recommend that American investors look at investing abroad, particularly in emerging markets and markets like India. While a US recession would affect the world, India’s economy is less correlated with the US and has more independence than many others.
Q 3) So, if the trade deal with the US moves closer to completion, would that further strengthen your case for diversifying into India?
Well, yes, absolutely. There are two parts to that. First, any clarification is likely to be positive for the markets, unless it’s terribly negative, which I don’t expect. Second, it’s really in the long-term strategic interest of both India and the US to remain close partners. It’s unfortunate that there are some bumps in the relationship, but hopefully, it will likely get back on track.
Q 4) Given your view that the bigger risk is economic uncertainty rather than a full-blown recession, how does that influence your regional allocations, particularly towards India?
US has been so exceptional in terms of returns that it has sucked in a huge amount of global capital. Despite structural reasons for the dollar to weaken and despite political uncertainty, money has continued to flow into US. That hasn’t changed so far.
What has changed is that, for the first time in at least five years, foreign markets have performed as well as or even better than the US in 2025. That’s largely because they’ve delivered solid earnings growth and are far less expensive than US markets. So, while the US remains the economic engine, it’s also expensive, and investors have to weigh both factors together.
As investors review performance at the end of the year, they’re likely to see strong returns in emerging markets. That’s why our key advice is diversification, especially beyond the MAG 7 (Alphabet, Amazon, Apple, Tesla, Meta, Microsoft, and Nvidia), in which passive strategies are now heavily overweight. We see emerging markets, and India in particular, as a natural place to diversify. Stronger currencies, better fiscal positions, and healthy earnings growth make emerging markets attractive investment opportunities going forward.
Q 5) What are people most frequently asking you about? Also, with foreign investors having sold Indian equities in recent periods, what do you think would prompt FIIs to return to the Indian market?
One area where we receive a lot of questions is China. As a firm, we have a very strong long-term commitment to India, and if I’m asked which market is the better long-term investment, I actually think it’s India. Global investors should be overweight India, even though they’ve been underweight emerging markets overall in recent years. India, in fact, has seen relatively higher allocations than other emerging markets, which partly explains the recent capital outflows, along with the very famous discord between our [US] administration and India’s. We think that will get resolved and flows will return.
That said, India did get a bit ahead of itself in terms of pricing and volumes versus other emerging markets. There are also questions about how India will fare in AI, but we believe the country is well-positioned, flexible, and likely to emerge stronger in AI implementation.
Q 6) How would you compare India and China?
China is more of a tactical investment, opportunity, and India, in my opinion, is more of a structural, long-term investment opportunity. So for our clients, we would advise clients to be invested in India with an outlook of five to ten years. We might suggest that people be invested in China with an outlook of six months or one year, depending on whether it’s inexpensive or not.
Q 7) Doesn’t India’s relatively expensive valuation worry you compared with other emerging markets?
First of all, India is always expensive relative to other emerging markets, but that’s fine. The structure of India’s economy is different. The question is whether India will get ahead of other markets and maintain that trend. Clearly, government stability and the pro-business, pro-growth policies are very positive for us. We think macro fundamentals and earnings are turning around. There’s a lot of policy support for infrastructure, manufacturing, and digitalization. The RBI (Reserve Bank of India) is increasingly supportive, which should drive credit growth. Some tax cuts are boosting consumption, especially in rural areas. We’re moving into a positive capex cycle, where demand is starting to catch up with prior investments. Overall, we see opportunities for individual participation, and our local team particularly sees potential in mid-caps.
Q 8) What is it that still makes India attractive—political stability, long-term growth prospects, or something else?
From a foreign perspective, the rupee has been down a lot in 2025, largely due to trade tensions. That’s probably why India hasn’t seen more inflows, rather than issues with the markets themselves. We don’t expect the rupee to depreciate as much going forward, though there are still challenges and some supply overhang. External risks, especially around the rupee, are important, and we’re monitoring them. Personally, I’m positive about India, partly because of the talent and flexibility here. We’re at an unsettled point on how that talent will be deployed, but I’m confident it will be used to boost productivity. Policy tailwinds, monetary support, decent monsoons aiding rural growth, a return of capex, and stabilized earnings all make the outlook brighter.
As I mentioned, I expect the market to hopefully stabilize. Aside from the rupee, the other major factor in 2025 was earnings downgrades, which we don’t expect to be as significant going forward. In terms of sectors, we are positive on financials, which we believe will see strong recovery supported by interest rates and credit growth. These are the main points I’d highlight for India.
Q 9) Given the recent rupee weakness you mentioned, do you see it as a concern, or is it not something to worry about?
I would say that the weakness in the rupee has caused foreign investors to stay away. If the rupee continues to be weak, that would keep foreigners away from both the fixed income as well as the equity markets. When people look at markets, especially equity markets, they often think it’s about the companies or something else, but from a foreign perspective, the currency is very crucial. And India is different from many other emerging markets this past year, many of which have currencies that have strengthened. Our global fixed income teams are very positive on emerging market debt, and that comes because of the quality of the fiscal balance sheets of many countries, and also because they think the currencies will appreciate relative to the dollar. That’s not the case with India, so that makes Indian capital flows less positive than many other emerging markets.
Q 10) So, how challenging is it to generate alpha, and what are the key ways to achieve it?
I think alpha is often misunderstood. Many equate it with higher returns, but it really means higher risk-adjusted returns, and the risk part is crucial. Currently, markets are near their highs, and people tend to focus too much on absolute returns rather than risk. Concentration in a few stocks and sectors makes the market risky, even if overall performance looks strong. While I’m optimistic about the market, I’m concerned about the risks. That’s why we advise investors to diversify and focus on risk-adjusted returns, even if it means absolute returns are a bit lower. The key takeaway: prioritize highest risk-adjusted returns, not highest absolute returns.
