Outside the US, Stephen Dover, chief market strategist at Franklin Templeton, is bullish on Japan and emerging markets, including India. Dover, who is also head of the Franklin Templeton Institute, stressed that an India-US trade deal would further strengthen his case for diversification into India. He explained that any clarification on the deal is likely to be positive for the markets, unless it is severely negative, which he does not 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 probably that relationship will get back on track,” he added. Edited Excerpts: Q 1) In India, there has been a lot of talk about the US heading for a recession and how this could cause a global slowdown that eventually spills over into the Indian economy. From your perspective, how real is that risk? You know, there’s been a forecast of a recession for the last five years, so we’ve had the biggest 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 won’t have a recession next year, largely because of the massive stimulus already in place. So our view is not that a recession cannot happen, but that it is unlikely. That said, assets like Bitcoin, which are highly leveraged and in the process of imploding, indicate that there may be leverage risks in the system, usually where problems arise. The US Federal Reserve has room to cut rates if necessary in a recession. In my experience as a value contrarian, when everyone agrees, I become skeptical. Recession may not be the right term; economic uncertainty fits better. Inflation can surprise upwards, 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 that the market could fall, but there is also a risk that it could continue to bubble higher. While you don’t want to be there when a bubble pops, you also have to participate in the upside, or you risk losing money overall. Q 2) So how should investors approach a market like this? This is why we think diversification is so important, especially away from artificial intelligence (AI), and for global investors, [investing] outside the US. This is why we recommend that US investors look to investing abroad, especially in emerging markets and markets like India. While a US recession will 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, will it further strengthen your case to diversify into India? Well, yes, absolutely. There are two parts to it. First, any explanation is likely to be positive for the markets, unless it’s horribly negative, which I don’t expect. Second, it is 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 probably get back on track. Q 4) Given your view that the bigger risk is economic uncertainty rather than a full-blown recession, how does this affect your regional allocations, particularly towards India? USA has been so exceptional in terms of returns that it has absorbed a large amount of global capital. Despite structural reasons for the weakening of the dollar and despite political uncertainty, money continued to flow to the US. This has not changed so far. What has changed is that for the first time in at least five years, foreign markets performed as well as or even outperformed the US in 2025. This is largely because they have delivered solid earnings growth and are much cheaper than US markets. So while the US remains the economic engine, it is also expensive, and investors must weigh both factors together. As investors review year-end performance, they are likely to see strong returns in emerging markets. This is why our key advice is diversification, especially outside the MAG 7 (Alphabet, Amazon, Apple, Tesla, Meta, Microsoft and Nvidia), in which passive strategies are now heavily overweighted. 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 do people ask you about the most? Also, with foreign investors selling Indian stocks in recent periods, what do you think will prompt FIIs to return to the Indian market? One area where we receive many 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 best long-term investment, I actually think it’s India. Global investors should be overweight India, even though they have been generally underweight emerging markets over the past few years. In fact, India has seen relatively higher allocations than other emerging markets, which partly explains the recent capital outflows, along with the well-known disagreement between us [US] administration and India’s. We think this will be resolved and flow will return. That said, India has gotten a bit ahead of itself in terms of prices and volumes vis-à-vis 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 view, is more of a structural, long-term investment opportunity. So for our clients, we will advise clients to invest in India with a five to ten year horizon. We can suggest that people invest in China with a six-month or one-year outlook, depending on whether it is cheap or not. Q 7) Does India’s relatively expensive valuation not worry you compared to other emerging markets? First, India is always expensive compared to other emerging markets, but that’s okay. The structure of India’s economy is different. The question is whether India will get ahead of other markets and maintain this trend. It is clear that government stability and the pro-business, pro-growth policies are very positive for us. We think macro fundamentals and earnings are turning around. There is a lot of policy support for infrastructure, manufacturing and digitalisation. The RBI (Reserve Bank of India) is increasingly supportive, which should drive credit growth. Some tax cuts boost consumption, especially in rural areas. We are moving into a positive capital cycle, where demand is starting to catch up with previous investments. Overall, we see opportunities for individual participation, and our local team sees potential in mid-caps in particular. 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 depreciated a lot in 2025, mainly due to trade tensions. This is probably why India has not seen more inflows, rather than problems with the markets themselves. We do not expect the rupee to depreciate that much going forward, although there are still challenges and some supply overhang. External risks, especially around the rupee, are important, and we monitor them. Personally, I am bullish on India, partly because of the talent and flexibility here. We are at an unsettled point as to how that talent will be deployed, but I am confident that it will be used to drive productivity. Policy headwinds, monetary support, decent monsoons helping rural growth, a return of capital investment and stabilized earnings all brighten the outlook. As I mentioned, I expect the market to hopefully stabilize. Apart from the rupee, the other big factor in 2025 was earnings downgrades, which we don’t expect to be that significant going forward. In terms of sectors, we are bullish on financials, which we believe will see strong recovery, supported by interest rates and credit growth. These are the main points I want to 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, it will keep foreigners away from both the fixed income and equity markets. When people look at markets, especially stock markets, they often think it’s about the companies or something else, but from a foreign perspective, the currency is very crucial. And India differs from many other emerging markets in recent years, many of which have currencies that have strengthened. Our global fixed income teams are very bullish on emerging market debt, and this is 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. This is not the case with India, so this 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 this 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 am optimistic about the market, I am concerned about the risks. Therefore, we advise investors to diversify and focus on risk-adjusted returns, even if this means absolute returns are a little lower. The most important takeaway: prioritize highest risk-adjusted returns, not highest absolute returns.
