India and Southeast Asia offer calm in the storm India and Southeast Asia offer calm in the storm India and Southeast Asia offer calm in the storm

India and Southeast Asia offer calm in the storm

Charu Chanana

Head of FX Strategy

Summary:  As the Fragmentation Game is on and the global economy becomes, well, less global, India and, to some extent, Southeast Asian economies seem to be in a solid position to gain from all the turmoil that ensues.

The economic, political and financial restructuring of the world will likely bring multiple shocks for the vulnerable emerging and developing economies. But the self-sufficiency end goal that is a core tenant of our Fragmentation Game theme is still a stretched concept, and as major global economies de-link, there will also be a need to re-link and find new friends. India remains a key partner choice for many global economies not just in terms of trade, but also in security and technology, bringing long-term investment opportunities in a fragmenting world. A number of Southeast Asian economies also stand to gain in a fragmenting global economy.

India’s ambition as reliable trade partner

The US-China rivalry brought about the first clear signs of a shift in manufacturing supply chains, and the Covid-19 pandemic and Russia’s invasion of Ukraine further boosted the need for resilient supplies. While focus has clearly been to shift away from over-dependence on China – the factory of the world – global economies have struggled to find a reliable trading partner that can provide the scale and skills of Chinese workers. India, Vietnam and Mexico have emerged as key beneficiaries of the supply chain shifts. Tailwinds for India include solid economic fundamentals, a sound digital infrastructure and favourable demographics. However, India’s manufacturing gains have been constrained by its protectionist stance and a weak business climate.

The dynamics are now changing quickly, with India working hard to position itself as an attractive manufacturing and export hub for multinational companies. The Modi administration has been offering financial incentives to companies that are keen on making India their production hub. The Production Linked Incentive (PLI) scheme has been a key force to attract investments in some of the prioritised sectors such as vehicles and auto components, speciality steel, advanced batteries, solar panels, mobile phones, electronics components, pharmaceuticals and food processing.

In addition, India has made a clear shift of attitude on free trade deals, pivoting towards a focus on reducing trade barriers, eliminating tariffs and looking to gain preferential access to global markets. Bilateral deals appear to be India’s key focus, and pacts with Australia and the UAE were concluded in 2022, and ongoing negotiations with partners such as the EU, the Gulf Co-operation Council, Israel and the UK to be concluded by 2025. These initiatives are driving a favourable shift in India’s image as a global trading partner. Apple’s intention to make its latest iPhone 14 model in India has been a victory lap.

India continues to make strides, but old issues remain

While this focus on attracting manufacturing has allowed India’s exports to soar to a record high in FY2022 (year ending March 2022), India is also making strides to achieve significant structural shifts in the trade product basket by being more integrated in global value chains and also in the geographical composition of its foreign trade in order to reduce its dependence on imports from China, while expanding its market access to Australia, Japan and the U.S.

While all of the major economies want India by their side in the new world order, India’s corporate governance issues, as recently highlighted by the Adani crisis as well, may continue to be a key headwind. Sub-standard bureaucracy and infrastructure, as well as a lack of skilled labour and poor production quality, are key risk factors. Indian corporates also remain less competitive due to the protected domestic market, and that is a key reason why India continues to lag behind other economies like Vietnam, Bangladesh or Turkey in gaining a more significant presence in global manufacturing supply chains. While a large domestic market means India has a bigger potential to gain a significant portion of the manufacturing pie, India still has a lot of catch-up to do. Do note that Turkey’s sharp rise in manufacturing output as a percentage of GDP is due to the rising export value of its output in local currency GDP terms due to a significant Turkish lira devaluation.

Figure 1: Manufacturing Value Added (% of GDP)

Banking sector turmoil sends shivers through Indian IT startups

India remains a safe haven amid global contagion fears in the banking sector, given a domestic deposit base and investments denominated in INR bonds. While we warned earlier that India’s valuations looked stretched at the start of the year, risk-reward has turned more favourable after a significant correction in the Indian stock market in Q1. Domestically focused sectors, as well as quality companies with stable cash flows and strong growth in sectors such as banks, pharma and utilities continue to be interesting.

Figure 2: Comparison of P/E for MSCI Asia Pacific and MSCI India

The Indian tech sector also remains favourable amid the global digitisation demands. Increasing fragmentation may also mean further dependence on Indian IT offerings. A turn in Fed policy, if one was to happen due to the financial risks, also bodes well for the Indian technology stocks. However, the collapse of the Silicon Valley Bank may leave some lasting jitters for Indian tech startups who had deposits in the US. Fresh funding from venture capitalists may remain limited, constraining innovation until funding lines are reaffirmed.

Minimal contagion risks to Asia’s financial sector

Banking sector turmoil is a key focus at the time of writing, following the collapse of some regional US banks and a takeover of Credit Suisse by UBS at a significant discount and wiping out of the Additional Tier-1 capital holders. Even after authorities have stepped in, markets remain nervous about the banking sector outlook on the risk to the funding costs for US, European and other DM banks, which could eventually lead to a credit crunch.

While de-risking portfolios is a key theme in this scenario, it is also prudent to emphasise the benefits of diversification once again. Asian credit, especially at the front end of the curve, remains far less vulnerable in light of a somewhat lower degree of policy tightening in the region in the current cycle. Meanwhile, the largest Asian financial firms are mostly state-owned, primarily in India and China, and they also have limited foreign inflow exposure, which keeps contagion risks restrained. In addition, Asian credit continues to be supported by a better growth outlook in China, in contrast to the rising recession as well as financial risks in the US.

Asia’s reopening tailwinds have room to run

With all the focus shifting recently to concerns on the banking sector, the China reopening theme has been somewhat forgotten by the markets. However, it is worth noting that consumption in China is still on solid recovery ground, and this brings tailwinds to the Asian markets in general. The Chinese policy also remains tilted to growth, and the latest proof of that has come from a cut in reserve requirement ratio in March. To add to that, a likely quicker turn in the Fed monetary policy in light of the financial risks, as well as lower oil prices, also means a supportive stance for Asian equities remains in place.

One of the key beneficiaries of China reopening will likely be travel and tourism stocks in Asia. We launched the Asia Pacific Tourism equity theme basket to capture the expectations of an improvement in China’s outbound tourism. The list contains predominantly Asian stocks across booking platforms, airlines, airport services, hotels, casinos and restaurants in countries that will likely see the biggest inflow of tourists from China over the course of the year. Meanwhile, Thai and Indonesian equities also look promising in Southeast Asia.

North Asian equities in Korea and Taiwan, as well as Japanese banks, are likely to face more significant contagion risks from the US banking stress. Being more export-driven, Korean and Taiwanese equities could also face greater headwinds from slowing global demand. Meanwhile, gains in the safe-haven Japanese yen may weigh on the outlook of overall Japanese equities as well, along with the slower global growth outlook. However, expectations of a tweak in the Bank of Japan’s policy under the new incoming Governor Ueda will be key to monitor.

Figure 3: Asia Pacific Tourism Equity Theme Basket

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (
- Analysis Disclaimer (
- Notification on Non-Independent Investment Research (

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000

Contact Saxo

Select region


The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.