Unsafe haven (the simplified version)

New financial reporters quickly learn that there is no such thing as truly “safe havens” in the financial world. Editors, keen to save words, often say that “all havens are safe.” Assets that hold their value during tough times (like gold, the Swiss franc, and the Japanese yen) are simply called “havens”—no need to add “safe.”

In real life, finding a safe haven is difficult. The usual assets have seen a lot of demand after President Donald Trump announced new tariffs on April 2nd. Gold prices have hit record highs. The yen has strengthened. Some short-term Swiss bonds now offer negative returns. Investors are looking for new, cheaper safe places.

Is South Asia a good option? Indian stocks are unlikely to be considered safe. Emerging markets are usually seen as risky and tend to do well when global investors feel confident, not during downturns. America’s S&P 500 index has dropped by 9% this year. India’s main strength is its growth, not its ability to protect investors’ money. Also, there are specific reasons why cautious investors should avoid India. Its stock market has risen sharply in recent years because of a flood of investments from inexperienced local investors. The government has also tightened rules on derivatives after many people lost money.

Still, a few investment funds are promoting India as a safer choice during Mr Trump’s trade war. India is expected to face relatively low tariffs: on April 2nd, Mr Trump said India would have a tariff of 26%, compared to 37% for Bangladesh and 46% for Vietnam. Later, he delayed these tariffs by 90 days.

India also relies less on exports, with goods exports making up only about 15% of its economy, compared to 60% in Thailand and 85% in Vietnam. That’s one reason India’s main stock index, the Nifty 50, is up 5% since the tariff announcement, while Hong Kong’s Hang Seng index is down 5% and Vietnam’s Ho Chi Minh index is down 8%. Consumer goods and banking stocks in India have done particularly well.

It marks a big turnaround. After Trump’s 2016 election win, India’s Nifty 50 fell by 13%. A strong dollar and a weak Indian rupee back then caused foreign investors to move their money elsewhere, mainly to China. At the time, Chinese tech companies were making fast progress, and the government was planning economic support. Now, the dollar is weaker and China’s economy is slowing because of less demand from America. These quick changes have helped Indian share prices, which over the past six months have moved in the opposite direction of America’s market. If this trend continues, India could act as a safe place during the trade war.

On top of that, India’s economy might continue to grow well. The central bank has room to lower interest rates because inflation is low, at 3.3%, which is below its 4% target. The government has also made it easier for banks to lend money. A weaker dollar reduces the pressure to defend India’s currency, the rupee. (The bigger worry now is China possibly cutting the value of its currency, which could hurt Indian exports.) The government might also increase spending if needed. Forecasts suggest that the monsoon rains will be better than normal, which would help farmers and lower food prices.

India might be able to avoid much of the trade war’s damage, helped by its strong local economy and the weak dollar. It has some good points, but also risks. Investing there remains uncertain. Indian stocks are priced about 20% higher than stocks elsewhere because India’s economy grows around 10% in nominal terms each year. However, analysts expect only small growth in company profits this year, making these high prices hard to defend. A lot still depends on the success of the monsoon rains. Meanwhile, there are signs that middle-class debt is rising, and economists are debating whether the current slowdown is temporary or more serious. In short, even for careful investors, it turns out that havens are not always truly safe.