Global equity markets not pricing in a severe downturn just yet, says Nomura’s Karkhanis

Any progress on a US-China settlement could calm market nerves and potentially trigger a turnaround—especially in non-US markets, said Karkhanis. “I think regions like Europe and India could see a significant wave of inflows and investor interest in that scenario."

Karkhanis flagged some selling of US assets—both equities and debt—as investors begin shifting towards Europe, Japan and emerging markets (EMs), especially China after its fiscal stimulus announcement. He noted that while inflows into India are starting to pick up, the trend is still in its early stages. Overall, he believes the outflows from the US have not been significant.

Edited excerpts:

Let’s begin with the big question that’s on everyone’s mind right now—the growing fears of a global recession. The IMF (International Monetary Fund) has also flagged potential risks on that front. How do you interpret these concerns, particularly starting with the US, and what kind of ripple effect could this have on global markets?

I think it is useful to look at the US and the rest of the world a bit differently. The core issue here is trade uncertainty, and since the US is at the centre of it, the risk of a mild recession there is real. But “recession" often sounds worse than it is—there is not a big difference between 1% growth and 1% contraction. The real question is whether we are looking at a covid-style shock, something deep and disruptive that causes lasting damage to the economy. We don’t think that’s likely.

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The trade tensions seem to be moving from confrontation to negotiation now, which is a positive sign. Sure, there will be disruption—supply-chain changes, short-term inflation, lower capital investment—but if inflation remains under control and supply chains stay functional, the Fed (US Federal Reserve) has room to respond. Tariffs tend to be one-time shocks, with disinflationary effects afterwards.

Outside the US, recession risks look far lower. Countries like India and those in Europe still have room to cut rates or use fiscal tools. China might feel more pressure, but it is already stimulating its economy. And if you look at the equity markets, while the US is down, Europe and China are actually up this year. So, markets are not pricing in a severe global downturn just yet.

What impact is this having on allocations? From a fund manager’s perspective, how are they adjusting their allocations between debt and equity?

While one might expect a shift away from equities, particularly in the US, that has not happened yet. The real question is about debt, though I don’t think there are long-term concerns. We have seen some selling of US assets, both equities and debt, and a shift towards Europe, Japan and emerging markets, especially China since its fiscal stimulus announcement. We are also starting to see some flows into India, though that is still developing. Overall, the outflows from the US have not been significant.

Given Nomura’s focus on Asia, what is your outlook on China and investments there? How do you see the growth prospects, and how do you expect the US-China tariff war to play out?

China, once driven by exports and a global manufacturing hub, is now focusing on strengthening its domestic economy. It is looking to address the housing boom, and though fiscal spending has been slow, the outlook for recovery is improving. The trade war remains a major concern, not just with the US but also through proxies like South-East Asia and Mexico. For the US, replacing China’s manufacturing is challenging, as alternatives are limited. This points to the likelihood of a negotiated solution.

What is global investor sentiment like right now—are investors still in risk-on mode, or have they turned more risk-off?

Investors are risk-off because no one expected the scale of the tariff impact—especially that it would be global and hit even the closest allies of the US. And no one anticipated the kind of rhetoric that came with that either. I think this has raised a real question around US exceptionalism—whether the dollar and US treasuries are still the best investable assets, whether they still qualify as truly risk-free.

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The answer is still yes. There are many reasons the US remains unique, especially as a store of wealth. But the uncertainty around that is clearly greater than it was a few years ago, especially with the growing fiscal deficit.

That said, if there is progress on a US-China settlement, markets would likely find comfort in that. It could help steady sentiment and spark a turnaround—particularly for non-US markets. I think regions like Europe and India could see a significant wave of inflows and investor interest in that scenario.

And what is the biggest macro risk you are keeping an eye on?

I think the biggest macro risk is that if the tariff war does not get resolved and keeps escalating. If it turns into a real supply-chain collapse, where goods stop flowing, that would cause serious economic damage, especially for China and the US. Then it becomes a matter of who blinks first, and that is a bad outcome for everyone. Hopefully, it doesn’t come to that.

The other big risk is if this drags on and starts affecting dollar availability, either intentionally by the US or the dollar gets scarce when we go into a risk-off mode. That could start impacting credit availability and existing inventories across asset managers, banks and the broader financial system. The last thing we need is a financial crisis being triggered by this, and no one wins. I think we are still far from that.

What is your base case and worst-case scenario outlook for MSCI India and MSCI EM over 12 months?

My base case is that we see some form of improved settlement. In that scenario, even with India’s relatively higher valuations compared to other EMs, it should still do well and outperform. I would expect India to be up around 5-10%, and broader EMs maybe around 5%.

The worst-case scenario, though, could be quite severe. It is hard to pinpoint exactly, but if there is no settlement and we see a supply-chain breakdown, SMEs (small and medium enterprises) in middle America would take a big hit; we could see defaults, and even political instability in the US. In that case, EMs could fall 15%, and India would likely be pulled down, too—possibly around 10%.

How do you view Nomura’s business in India, and what’s your outlook for its growth here?

One of the reasons I’m here is that we had an offsite with the team to explore how to accelerate Nomura’s growth in India. There’s a lot of opportunity, and the firm is committed to investing in India. We see India not just as one of the best emerging market opportunities, but as one of the best global opportunities for investment. Japan and India share a long history of collaboration, particularly in infrastructure, which makes this a strong fit for Nomura.

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Our focus areas include private credit, where we have strong capabilities and see significant potential to deploy balance sheet capital. We’re also seeing strong growth in our equities business, and connecting further with India’s cash equity markets will be key for foreign investors.

Additionally, we’ve recently received approval for our FX (forex) licence, opening up new opportunities to provide FX solutions for both international and local clients. We are also exploring cross-border banking opportunities, particularly from Japan.