Booming Indian economy & implications for investing in equity markets with recommendations

 

Hey friends , History has a uncanny style of repeating itself 😍

 

Just 3 months ago , I wrote in my blog in August end , that my estimates about robust Indian GDP growth of 8% in FY26( which I predicted in my blogs early this year in March & Apri )  , turned out to be correct , unlike some incorrect narratives & estimations about GDP slowing  down to  6.5 % this year  by IMF/ world bank & our own RBI towing the line 🙏

The same history / story repeated again few days back , when last quarter( Q2 of FY26) , came out at 8.2 % (while the same big institutions as well as big investment banks/brokerages predicting slower GDP growth at about 6.5%) , despite US punishing tariffs in August .  Next quarters are going to be even better with GST reforms effect & potential  US trade deal closure.

You can take a look at my earlier blogs in March & April in my blog website link , where I have talked about this incorrect narratives ..

https://indiavalueinvesting.blogspot.com

 

I had been crying  like a lone wolf that all these arm chair economists of world bank/IMF & sadly our own  RBI  have been spreading incorrect narratives on Indian economy slowdown & consequently potential corporate earnings slowdown & potential over- valuation .This obviously led to crazy FIIs outflow since last year with adverse impacted on market/ index levels( They pulled out >2 lac crore since Sep last year).

Consequently , India markets(Nifty & Sensex) have not been the one of the top performers among International markets (US Nasdaq , US  S& P , Japan & Taiwan doing better), though we are the fastest growing big economy 🙏 . See the table below on YTD returns% for big Indexes

 

Top 25 Global Equity Indexes: 1-Year Return %

Rank	Index	Country/Region	1-Year Return	Trend Context (Nov '24 - Nov '25)
1	Nasdaq 100	🇺🇸 USA	+24.6%	Unabated momentum in AI & Semiconductors.
2	S&P 500	🇺🇸 USA	+18.4%	Broad-based rally; financials joined tech.
3	Nikkei 225	🇯🇵 Japan	+16.8%	Weak Yen in late '24 boosted exporters.
4	TAIEX	🇹🇼 Taiwan	+15.5%	TSMC led the charge on chip demand.
5	Nifty 50	🇮🇳 India	+14.8%	Pre-budget rally (early '25) + steady earnings.
6	BSE Sensex	🇮🇳 India	+14.2%	Mirroring Nifty; large caps outperformed midcaps.
7	Euro Stoxx 50	🇪🇺 Eurozone	+12.0%	Strong performance by ASML, SAP, and LVMH. Rate cuts
8	DAX	🇩🇪 Germany	+11.2%	Recovery from 2024 industrial lows. Rate cuts
9	CAC 40	🇫🇷 France	+9.5%	Luxury sector rebound in Q1 2025.
10	IBEX 35	🇪🇸 Spain	+8.5%	Banking sector benefitting from rates margin.
11	KOSPI	🇰🇷 South Korea	+8.1%	Samsung/Hynix cyclicals improving.
12	FTSE 100	🇬🇧 UK	+7.9%	Defense, Energy, and Pharma defensives.
13	SMI	🇨🇭 Switzerland	+7.2%	Safe-haven inflows amidst global volatility.
14	VN-Index	🇻🇳 Vietnam	+6.9%	Export growth acceleration.
15	TSX Composite	🇨🇦 Canada	+6.5%	Stabilized oil prices supported energy heavyweights.

 

🇮🇳 Global and Indian Equity Market Outlook: A Tale of Two Timelines

The global equity landscape presents a complex yet fascinating picture, balancing moderating inflation and interest rate cycles in developed markets against the robust, domestically-driven growth of emerging economies, especially India. Understanding the interplay between macroeconomic fundamentals and market dynamics is key to navigating the next 12 months (short-term) and the 1-3 year horizon (medium-term).

 

Big Picture: Growth Is Slower Globally, but India Still Stands Out

The latest IMF World Economic Outlook (Oct 2025) projects:

• Global GDP growth around 3.2% in 2025 and 3.1% in 2026, with advanced economies at ~1.5% and EMs just above 4%. 
• US growth revised up to about 2.0% in 2025 and 2.1% in 2026, helped by an AI-investment boom offsetting tariff headwinds. 
• Euro area expected to grow about 1.3% in 2025 and 1.2% in 2026, according to the European Commission.
• China projected at 4.8% GDP growth in 2025; still solid, but a far cry from its double-digit years. 
• India remains the standout: IMF, Moody’s and Deloitte all cluster around 6.5–6.9% annual growth over the next couple of years, making it one of the fastest-growing major economies globally. India grew at much higher 7.8% & 8.2% in last 2 quarters(Q1 and Q2 of FY26)

 

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🌎 Global Economy & Equity Outlook

The dominant narrative globally is the shift from high inflation and restrictive monetary policy toward a "soft landing" scenario.

Short-Term (Next 12 Months: 2026)

• Moderating Global Growth: Global growth and inflation are expected to moderate, though uncertainty remains elevated due to geopolitical risks and ongoing trade policy shifts.
• The US Focus: The US economy is expected to see slower but still positive growth, supported by resilient consumer balance sheets and robust AI-driven capital expenditure (CapEx). The Federal Reserve (Fed) is anticipated to pause cutting interest rates, likely front-loaded in the first half of the year.
• Projected Returns (US): Most short-term forecasts are bullish, anticipating positive returns in the range of 6-8% for 2026, driven primarily by earnings growth and the rate-cut cycle. The biggest risk is big time investments into AI (>500 Bil in 2025 itself) and projected optimistic Returns on AI related investments by big IT companies which is driving the current US equity rally . Is it a bubble or the returns/ profits will back this super optimism?  That time will only say as this is the single biggest risk.  The "Magnificent Seven" (Google, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) have driven a majority of the S&P 500's gains in recent years. This creates a scenario where if these stocks perform well, the index looks healthy, even if the other 493 companies are struggling
• Europe and China: Europe's outlook is supported by shareholder distributions and fiscal spending plans. China is expected to meet its growth target of around 4-5% for 2026, relying on continued policy support.
• Projected Returns (Europe): Similar to the US, a positive, but moderate return in the range of 5-7% is often projected, supported by easing inflation & monetary easing(European Central  bank cutting rates)
• Projected Returns (China): Volatility and policy uncertainty are high. Returns could be range-bound in the short term, possibly 3-5%, with significant dispersion.

Medium-Term (1-3 Years: 2027-2028)

• Structural Shifts: The medium-term outlook is shaped by structural forces like Artificial Intelligence (AI) investment &  ROI on these AI investments( single biggest risk), geopolitical fragmentation, and shifting global supply chains.
• Developed Markets (US & Europe): Growth is expected to converge towards potential, with AI-related investments likely driving CapEx. Ten-year forecasts from major institutions suggest annualized total returns for:
• Projected Returns (US): Around 6-7% annually (primarily driven by EPS growth). Major risk is around ROI in heavy AI related investments by Big tech(Magnificent Seven companies)
• Projected Returns (Europe): Around 7% annually (balanced between earnings and shareholder yield).
• Emerging Markets: Emerging Markets, including India, are positioned for stronger returns due to higher expected Earnings Per Share (EPS) growth.
• Projected Returns (Emerging Markets ex-Japan): Forecasts point to total annualized returns of over 10% for the next decade, with India being a key driver.

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🇮🇳 India: The Outperformance Story

India's equity market is increasingly being viewed through a structural lens, where strong domestic fundamentals are expected to decouple its performance from global headwinds over the long term.

I have always been bullish on Indian economic prospects and hence market returns( which has down a strong co-relation with GDP growth in India in long term). In my blogs in early2025(March/ April) when Nifty was at 22000(due to intense volatility), I had projected steady medium term rise to 28000 by FY26 end and today Nifty 50 is at 26000(despite short term volatility due to Trump’s tariff mania , Geopolitical reasons , massive FII outflows because of incorrect GDP slow down narrative . In last month blog (Abhi to party shuru hui Hai), I talked about this medium & long term optimism about Indian markets cause of structural India growth and demand story , strong macros , favourable govt & RBI policy & demographic dividends. This equity market outlook will now become better wit the latest GDP numbers at 8.2% , much higher than predicted (6.5%).

📈 Economic Backdrop: GDP & Consumption

India remains the fastest-growing major economy, with recent GDP data proving resilient.

• GDP Growth: Q2 FY26 growth was at 8.2%, driven mainly by manufacturing , robust services growth(including Financial services) and private consumption. With GST reforms and potential US deal coming , My estimates are that we will easily grow at 8 to 8.5%  in FY26 and 8% in FY27. We have become the 4^th biggest GDP after beating Japan this year & will soon become the 3^rd biggest after beating Germany in 2027(which is in almost recession)
• GDP-Equity Correlation: A unique feature of the Indian market is the strong, reliable correlation between real GDP growth& market  equity returns (in USD terms) over decades. This suggests that the economic expansion is effectively translating into corporate profits and stock market performance.
• Consumption & Capex Revival: Policy measures like GST rationalization and income tax relief are poised to boost domestic consumption significantly. Private Capital Expenditure (CapEx) is projected to become a stronger contributor to growth from 2027 onwards.

Short-Term Outlook (Next 12 Months)

• Near-term Volatility: The market may remain somewhat range-bound in the immediate short-term due to slightly higher valuations on an absolute basis(Nifty 50 at 22.7 versus 22.3 of  last 5 years average) and lingering global uncertainties (e.g., US tariffs/trade policy, wars ).
• Earnings Pick-up: An improvement in macro indicators , policy & taxation reforms (GST and Income Tax rationalization etc)and a strengthening earnings trajectory could set the stage for a stronger rally from the second half of 2026 onward. MSCI India consensus EPS growth estimates for the 2025/26 calendar year are around 13%. Consensus EPS growth for India in 2026 is broadly in the mid-teens (~14–16%)
• Projected Returns (India): Given the robust but consolidating phase, short-term returns are projected to be positive but potentially moderate, likely in the 10-12% range.

-        Goldman’s Nifty target of 29,000 by end-2026 implies ~12% upside from recent levels. 

-        HSBC’s Sensex target of 94,000 by end-2026 implies ~10–11% upside. 

-        Morgan Stanley’s call is at 95000 by 2006 end (12% upside  from current levels)  

-        My estimates are much more optimistic (based on strong macros , structural growth story and earnings growth picking up & FIIs returning back in Oct/ Nov after over-selling in last few quarters) at 15-20% growth with Nifty 50 at 31000 to 32000 levels by end-2026 (from 26000 level now)

 

Medium-Term Outlook (1-3 Years)

• Structural Bull Run: The medium term is highly constructive. Supported by an expanding domestic market, strong macro fundamentals, continued structural reforms (like 'Make in India' , GST and Income Tax rationalization, PLI incentives ), and rising investor inflows from Domestic Institutional Investors (DIIs), India is set for a structural bull market. MSCI India consensus EPS growth estimates for the 2026/27 calendar year are higher, at around $16\%$.
• Projected Returns (India): Over the 1-3 year horizon, India is expected to deliver premium returns. Annualized returns are projected to be in the 12-18% range, making it a key outperformer among major global markets. My estimates are more bullish at 15-18% growth

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🎯 Attractive Sectors in India (Projected Returns Perspective)

The best-performing sectors will be those that align with India's domestic growth drivers: Consumption, Infrastructure, and Policy-driven manufacturing. Apart from these sectors , dont forget to invest 10-20% of your portfolio into Gold ETF as Gold has become a mandatory & strategic diverifier (apart from being a safe haven) & has done better than equity in last 5 to 10 years(17-19% returns versus 13-15% returns of equity/ Nifty 50)

Sector	Rationale for Growth (Medium-Term)	Key Drivers
Consumer Discretionary/Automobiles	Direct beneficiary of rising disposable income, GST rationalization (lowering prices), and pent-up demand.	Festive seasons, tax relief, credit policy easing for auto loans.
Infrastructure & Capital Goods	Supported by the government's sustained focus on CapEx and the eventual revival of private CapEx (from 2027).	Government's National Infrastructure Pipeline, urban development, manufacturing supply chain shifts. PLI incentives
Banking and Financial Services (BFSI)	Expected to remain strong due to steady credit growth, improved liquidity transmission, and the overall financial health of the economy.	Steady credit growth, low inflation supporting margins, formalization of the economy. Monetary easing by RBI
Renewable Energy	Driven by aggressive national targets (e.g., 500 GW of renewable energy capacity by 2030) and supportive government policies.	Solar, wind, Green Hydrogen  and bioenergy capacity expansion; falling technology costs.
Healthcare & Pharmaceuticals	Increasing healthcare demand from an aging population, rising disposable income, and government initiatives like Ayushman Bharat.	Higher health insurance penetration, focus on domestic manufacturing (APIs).
Defence & Electronics Manufacturing	Policy-driven growth from the focus on Self-Reliance (Aatmanirbhar Bharat). Defence production is targeted to triple by 2029. Electronics(including Smart phones) have become one of the largest exports driver recently	Import substitution, technology-led manufacturing schemes (PLI).

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Final Takeaway

The next 12 months for global equities will be a transitional phase, defined by the pace of rate cuts, Geopolitical issues , US-India trade deal closure , returns on big AI investments & the outcome of the US 'soft landing.' However, the medium-term outlook is distinctly skewed in favor of India. Its robust & resilient GDP-led earnings growth, powerful domestic consumption engine, and aggressive structural reforms position it as a key market for outperformance. This Indian equity market outlook will now become better wit the latest GDP numbers at 8.2% , much higher than predicted (6.5%).

Happy investing

Amardeep

 

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Global and Indian Equity Market Outlook: A Tale of Two Timelines

 

 Global and Indian Equity Market Outlook: A Tale of Two Timelines

The global equity landscape presents a complex yet fascinating picture, balancing moderating inflation and interest rate cycles in developed markets against the robust, domestically-driven growth of emerging economies, especially India. Understanding the interplay between macroeconomic fundamentals and market dynamics is key to navigating the next 12 months (short-term) and the 1-3 year horizon (medium-term).

 

Big Picture: Growth Is Slower Globally, but India Still Stands Out

The latest IMF World Economic Outlook (Oct 2025) projects:

• Global GDP growth around 3.2% in 2025 and 3.1% in 2026, with advanced economies at ~1.5% and EMs just above 4%. 
• US growth revised up to about 2.0% in 2025 and 2.1% in 2026, helped by an AI-investment boom offsetting tariff headwinds. 
• Euro area expected to grow about 1.3% in 2025 and 1.2% in 2026, according to the European Commission.
• China projected at 4.8% GDP growth in 2025; still solid, but a far cry from its double-digit years. 
• India remains the standout: IMF, Moody’s and Deloitte all cluster around 6.5–6.9% annual growth over the next couple of years, making it one of the fastest-growing major economies globally. India grew at much higher 7.8% as per latest quarter results(Q1 FY26-April -June)

 

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🌎 Global Economy & Equity Outlook

The dominant narrative globally is the shift from high inflation and restrictive monetary policy toward a "soft landing" scenario.

Short-Term (Next 12 Months: 2026)

• Moderating Global Growth: Global growth and inflation are expected to moderate, though uncertainty remains elevated due to geopolitical risks and ongoing trade policy shifts.
• The US Focus: The US economy is expected to see slower but still positive growth, supported by resilient consumer balance sheets and robust AI-driven capital expenditure (CapEx). The Federal Reserve (Fed) is anticipated to pause cutting interest rates, likely front-loaded in the first half of the year.
• Projected Returns (US): Most short-term forecasts are bullish, anticipating positive returns in the range of 6-8% for 2026, driven primarily by earnings growth and the rate-cut cycle. The biggest risk is big time investments into AI (>500 Bil in 2025 itself) and projected optimistic Returns on AI related investments by big IT companies which is driving the current US equity rally . Is it a bubble or the returns/ profits will back this super optimism?  That time will only say as this is the single biggest risk.  The "Magnificent Seven" (Google, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) have driven a majority of the S&P 500's gains in recent years. This creates a scenario where if these stocks perform well, the index looks healthy, even if the other 493 companies are struggling
• Europe and China: Europe's outlook is supported by shareholder distributions and fiscal spending plans. China is expected to meet its growth target of around 4-5% for 2026, relying on continued policy support.
• Projected Returns (Europe): Similar to the US, a positive, but moderate return in the range of 5-7% is often projected, supported by easing inflation & monetary easing(European Central  bank cutting rates)
• Projected Returns (China): Volatility and policy uncertainty are high. Returns could be range-bound in the short term, possibly 3-5%, with significant dispersion.

Medium-Term (1-3 Years: 2027-2028)

• Structural Shifts: The medium-term outlook is shaped by structural forces like Artificial Intelligence (AI) investment &  ROI on these AI investments( single biggest risk), geopolitical fragmentation, and shifting global supply chains.
• Developed Markets (US & Europe): Growth is expected to converge towards potential, with AI-related investments likely driving CapEx. Ten-year forecasts from major institutions suggest annualized total returns for:
• Projected Returns (US): Around 6-7% annually (primarily driven by EPS growth). Major risk is around ROI in heavy AI related investments by Big tech(Magnificent Seven companies)
• Projected Returns (Europe): Around 7% annually (balanced between earnings and shareholder yield).
• Emerging Markets: Emerging Markets, including India, are positioned for stronger returns due to higher expected Earnings Per Share (EPS) growth.
• Projected Returns (Emerging Markets ex-Japan): Forecasts point to total annualized returns of over 10% for the next decade, with India being a key driver.

---

 India: The Outperformance Story

India's equity market is increasingly being viewed through a structural lens, where strong domestic fundamentals are expected to decouple its performance from global headwinds over the long term.

I have always been bullish on Indian economic prospects and hence market returns( which has down a strong co-relation with GDP growth in India in long term). In my blogs in early2025(March/ April) when Nifty was at 22000(due to intense volatility), I has projected steady medium term rise to 28000 by FY26 end and today Nifty 50 is at 26000(despite short term volatility due to Trump’s tariff mania , Geopolitical reasons , massive FII outflows. In last month blog (Abhi to party shuru hui Hai), I talked about this medium & long term optimism about Indian markets cause of structural India growth and demand story , strong macros , favourable govt & RBI policy & demographic dividends.

📈 Economic Backdrop: GDP & Consumption

India remains the fastest-growing major economy, with recent GDP data proving resilient.

• GDP Growth: Q2 FY26 real GDP growth was estimated to be strong, around 7.5% YoY, driven mainly by robust services growth and private consumption. Commerce and Industry Minister Piyush Goyal has expressed confidence that India's growth could touch 7% for the fiscal year, comfortably above global projections. My estimates are that we will easily grow at 8% in FY26 and FY27. We have become the 4^th biggest GDP after beating Japan this year & will soon become the 3^rd biggest after beating Germany(which is in almost recession) In 2027.
• GDP-Equity Correlation: A unique feature of the Indian market is the strong, reliable correlation between real GDP growth& market  equity returns (in USD terms) over decades. This suggests that the economic expansion is effectively translating into corporate profits and stock market performance.
• Consumption & Capex Revival: Policy measures like GST rationalization and income tax relief are poised to boost domestic consumption significantly. Private Capital Expenditure (CapEx) is projected to become a stronger contributor to growth from 2027 onwards.

Short-Term Outlook (Next 12 Months)

• Near-term Volatility: The market may remain somewhat range-bound in the immediate short-term due to slightly higher valuations on an absolute basis(Nifty 50 at 22.7 versus 22.3 of  last 5 years average) and lingering global uncertainties (e.g., US tariffs/trade policy, wars ).
• Earnings Pick-up: An improvement in macro indicators and a strengthening earnings trajectory could set the stage for a stronger rally from the second half of 2026 onward. MSCI India consensus EPS growth estimates for the 2025/26 calendar year are around 13%. Consensus EPS growth for India in 2026 is broadly in the mid-teens (~14–16%)
• Projected Returns (India): Given the robust but consolidating phase, short-term returns are projected to be positive but potentially moderate, likely in the 10-12% range.

-        Goldman’s Nifty target of 29,000 by end-2026 implies ~12% upside from recent levels. 

-        HSBC’s Sensex target of 94,000 by end-2026 implies ~10–11% upside. 

-        Morgan Stanley’s call is at 95000 by 2006 end (12% upside  from current levels)  

-        My estimates are much more optimistic (based on strong macros , structural growth story and earnings growth picking up & FIIs returning back in Oct/ Nov after over-selling in last few quarters) at 15-20% growth with Nifty 50 at 31000 to 32000 levels (from 26000 level now)

 

Medium-Term Outlook (1-3 Years)

• Structural Bull Run: The medium term is highly constructive. Supported by an expanding domestic market, strong macro fundamentals, continued structural reforms (like 'Make in India' , GST and Income Tax rationalization, LI incentives ), and rising investor inflows from Domestic Institutional Investors (DIIs), India is set for a structural bull market. MSCI India consensus EPS growth estimates for the 2026/27 calendar year are higher, at around $16\%$.
• Projected Returns (India): Over the 1-3 year horizon, India is expected to deliver premium returns. Annualized returns are projected to be in the 12-18% range, making it a key outperformer among major global markets. My estimates are more bullish at 15-18% growth

---

🎯 Attractive Sectors in India (Projected Returns Perspective)

The best-performing sectors will be those that align with India's domestic growth drivers: Consumption, Infrastructure, and Policy-driven manufacturing.

Sector	Rationale for Growth (Medium-Term)	Key Drivers
Consumer Discretionary/Automobiles	Direct beneficiary of rising disposable income, GST rationalization (lowering prices), and pent-up demand.	Festive seasons, tax relief, credit policy easing for auto loans.
Infrastructure & Capital Goods	Supported by the government's sustained focus on CapEx and the eventual revival of private CapEx (from 2027).	Government's National Infrastructure Pipeline, urban development, manufacturing supply chain shifts. PLI incentives
Banking and Financial Services (BFSI)	Expected to remain strong due to steady credit growth, improved liquidity transmission, and the overall financial health of the economy.	Steady credit growth, low inflation supporting margins, formalization of the economy. Monetary easing by RBI
Renewable Energy	Driven by aggressive national targets (e.g., 500 GW of renewable energy capacity by 2030) and supportive government policies.	Solar, wind, Green Hydrogen  and bioenergy capacity expansion; falling technology costs.
Healthcare & Pharmaceuticals	Increasing healthcare demand from an aging population, rising disposable income, and government initiatives like Ayushman Bharat.	Higher health insurance penetration, focus on domestic manufacturing (APIs).
Defence & Electronics Manufacturing	Policy-driven growth from the focus on Self-Reliance (Aatmanirbhar Bharat). Defence production is targeted to triple by 2029. Electronics(including Smart phones) have become one of the largest exports driver recently	Import substitution, technology-led manufacturing schemes (PLI).

---

Final Takeaway

The next 12 months for global equities will be a transitional phase, defined by the pace of rate cuts, Geopolitical issues , US-India trade deal closure , returns on big AI investments & the outcome of the US 'soft landing.' However, the medium-term outlook is distinctly skewed in favor of India. Its robust & resilient GDP-led earnings growth, powerful domestic consumption engine, and aggressive structural reforms position it as a key market for outperformance.

Happy investing

Amardeep

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Is this the start of the end of Dollar & US hegemony ?? Implications for investors

 

Title : Is this the start of the end of Dollar & US hegemony ?? Implications for investors 

Hello friends

 

  This innocent looking table(Published in Economic Times this week) startled my mind & forced me to dig deeper . After digging deeper & doing some research through credible sources & AI tools , my earlier belief became stronger that “ This is the beginning of end of Dollar hegemony & consequently US hegemony & domination over global economy & markets” . Why do I say so? Just have  a closer look on the table & few observations.

·         Is US Fed losing confidence in its own currency ? Does it not consider its own creation US Treasury bills  as a “safe haven” ? Why US Fed has quadrupled its gold reserves in tons in last 8 years , increasing its Gold holding share to almost 80% of its reserves( highest among all big economies)? Does it know something about USD outlook which it is hiding ?

·        Why the developed world & US allies (Germany, Italy, France etc) hold Gold as the major reserve asset/ currency (>75%) ?  Do they not consider USD/T-bills as the safest haven asset?  Has Gold replaced USD/T-bills as the “safest haven”? Do they know something about USD outlook , which other nations don’t know?

·        Why Japan & China has hurriedly reduced their USD/ T bills holdings to half , by massive 1.7 Trill $ in 8 years ? Do they know something more than other nations about USD outlook?

·        Has Gold replaced USD/ T-bills as the safest haven ?  Central banks have been madly hoarding Gold in last decade or more .  Only these top 10 economies have hoarded average of 1000 tonnes of gold every year(@130 billion $ > 3% Indian economy size every year) . No wonder Gold has done so well in last 5 -10 years(15-18% CAGR), better than equities.

·        Why India is still over-invested into T-bills and under-invested into Gold(14% share only) with respect to US & developed nations? Should the RBI wake up and follow the US Fed & developed world ? Are we trying to be “ Holier than Thou” & impressing somebody in US ?

 

This wet my appetite as this will have implications on our investments, asset diversification  & their returns , which I will cover later…  I started digging more into this affair through AI tools like Chat Gpt , Google Gemini to get some credible data & deeper trends through credible sources.

 

·        Share of US treasuries in Global central bank treasuries  has dropped from 72% in 2001 to 62% in 2010 & 54 % now (that’s 18% drop in 24 years@ 0.75% per year) . By this rate , it will be less than 50%(no more majority of reserves) in 5 years(by 2031) and less than 40% in less than 20 years(by 2044) . See the declining trends(Source Chat GPT query)

 

·         While the share of US T-bills have fallen by 8% (from 62 to 54%) in last 15 years in central bank reserves, Gold holdings% has gone up by 6% (from 10% to 16%) .Has Gold replaced US T-bills as the “safest haven” ?No wonder, Central banks have been madly hoarding Gold in last decade or more . Only these top 10 economies have hoarded average of 1000 ton of gold every year(@130 billion $ at current prices). No wonder Gold has done so well in last 10 years(15% CAGR), much better than equities (Nifty at 12% & NYSE at 11% in 10 years). Pl see graph below(Source Chat GPT)

 

·        Foreign investor share of US Treasury holdings have reduced from 50% in 20008 to 30% in 2025 , including the major holders like Japan & China, which have almost halved their US T-bill holdings since 2017 by about massive 1.7 Trillion $ ( Pl refer the first table in the blog).

 

 

·        Even the share of USD in global transactions (trade , Forex and capital ones) have come down from 52% to 42% in 2 decades(2004 to 2022) , which is measured by SWIFT payments(inter bank transactions). This shows that share of Dollar/ T bills coming down for both reserve currency as well as transaction/ trade currency.

 

This led me to think & research more about USD outlook & its implications on our investments, asset diversification  & their returns. I had raised concerns about strength of US economy & USD earlier too in my blog recently (late September) with the headline.

 " Interesting Global marathon for economic & market power between 3 players - US , China & India" 

I am putting the blog link here ..

https://indiavalueinvesting.blogspot.com/2025/09/interesting-global-marathon-race-for.html

 

Putting some relevant portions from the blog on US economy & equity markets related concerns..

“For over a century, the U.S. economy has been the backbone of global growth and financial markets. Even today, it accounts for nearly 25% of global GDP and houses the world’s deepest & most liquid capital(bonds, T bills & equity) markets. 

 

•             Strengths: The U.S. thrives on its innovation engine — Silicon Valley, biotech hubs, green energy, and AI leadership. Consumer spending, which makes up about 70% of GDP, continues to power growth. Institutions remain strong, attracting global capital.

•             Challenges: The fiscal debt burden is climbing above 125% of GDP, demographics are aging, and productivity growth is uneven. Rising geopolitical competition also weighs on its long-term outlook. Other nations & central banks  are slowly but steadily moving towards de-dollarization & chosing Gold as the safest haven, instead of USD/ T Bills in earlier times , which could challenge the Dollar status as world reserve currency. Another big risk is heavy concentration of market growth in a handful of large tech companies, often referred to as FAANG or the "Magnificent Seven". The top 10 stocks, primarily tech giants, can represent over 37% of the S&P 500's total value. The "Magnificent Seven" (Google, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) have driven a majority of the S&P 500's gains in recent years. This creates a scenario where if these stocks perform well, the index looks healthy, even if the other 493 companies are struggling. This masks broader economic weakness.” Magnificent seven stocks are mainly going up , based on their AI related investments and earnings projections ( accounting for >50% of market cap gains of S&P 500 this year )and hence their could be a bubble/ over-hype  situation , if  they don’t deliver on AI projections.”

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US Dollar as a Global Reserve Currency

The USD remains the preeminent reserve currency, comprising approximately 54% of disclosed global official foreign reserves as of 2025, far surpassing the Euro (≈20%) and others. However, its share has been on a gradual, long-term decline from a peak of 72% in 2001 to 54% now & probably less than 40% in next 20 years( as per the current trends).

Key Long-Term Risks to Dominance (Erosion of Trust)

• US Fiscal Health: The biggest structural risk is the US's growing national debt(at 38 Trillion $@125% of GDP) and persistent fiscal deficits (projected at ≈6.5% of GDP). This can undermine the "safe haven" status of the USD and US Treasury securities, potentially leading to a higher cost of borrowing or a weaker dollar if the Federal Reserve is compelled to intervene.
• Diversifying central bank reserves: Growing concerns on dollar stability & US fiscal health has led to central banks reducing their USD/ T-bill holding from 72% to 54% (last 24 years) and increasing their other categories (primarily Gold @16% and Euro@20% share)
• Weaponization of the Dollar: The use of financial sanctions (e.g., against Russia) has prompted some countries, particularly strategic rivals and certain emerging markets, to actively seek alternatives for trade and reserves to reduce their vulnerability.
• BRICS challenge – As of 2025 , 10 BRICS countries( Led by Brazil , Russia, India , China , South Africa) & 13 partner nations are developing the BRICS Bridge payment network to settle transactions using Central bank digital currencies. This might become a big challenge to USD hegemony in future.
• Political Instability: Increased political polarization and recurring issues like debt limit confrontations in the US ( leading to current US Fed govt shut down) can raise doubts about the stability of US governance, which is a core pillar of the dollar's credibility.

 

 

Key Factors Supporting Dominance (Structural Advantages)

• Deep and Liquid Markets: The sheer size, openness, and sophistication of US financial markets (equities and bonds) are unmatched globally. This provides the world with a vast supply of safe, liquid, dollar-denominated assets, which no other currency can currently rival.
• Network Effects: The dollar's dominance is deeply entrenched in the global financial architecture (banks, clearinghouses, and payment systems). The cost and institutional shift required for countries to fully divest are prohibitively high, creating a strong inertia that favors the USD.
• Lack of a Viable Alternative: The decline in the USD's share has not led to a corresponding surge in a single competitor ,like the Euro or the Chinese Renminbi( which currently holds only ≈2% of reserves). Instead, reserve managers are increasingly diversifying into Gold(from 10% to 16% in last 15 years) & a wider range of smaller, "nontraditional" currencies (e.g., Australian Dollar, Canadian Dollar).
• Rule of law and institutional depth: US legal, regulatory and financial infrastructure (settlement, custody, accounting standards) Favors USD usage.

 

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🌍 US Dollar as a Global Trading Currency

The USD's role as a medium of exchange and unit of account in international trade is also likely to remain dominant but face gradual erosion from de-dollarization efforts and technological advancements. Share of USD in global transactions (trade , Forex and capital ones) have come down from 52% to 42% in 2 decades(2004 to 2022) , which is measured by SWIFT payments(inter bank transactions). Hence, it has already lost its majority share(>50%) of all SWIFT transactions(Trade related, Forex deals & capital flows)

 

Factors Causing Erosion

• Commodity Pricing: There is a visible, growing trend of commodity contracts, particularly in energy, being priced in non-dollar denominations as countries like China and Russia push for alternatives.
• Regional Trade Blocs: A global shift towards greater geo-economic fragmentation and the formation of regional trade blocs could lead to more trade being invoiced in the currencies of the dominant regional economies, diminishing the USD's role.
• Digital Currencies (CBDCs): While private cryptocurrencies like Bitcoin are not seen as a threat to reserve currency status, the development of Central Bank Digital Currencies (CBDCs) by other major economies (which the US has been slow to pursue) could eventually offer an alternative for cross-border financial transactions.
• Growth differentials: Faster growth in Asia (China, India, ASEAN) increases trade and financial flows in non‑USD currencies over time.
• Rise of alternatives: Euro, Chinese renminbi, and basket/Special Drawing Rights (SDR) can grow share, especially regionally; but each has material constraints.
• BRICS challenge – As of 2025 , 10 BRICS countries( Led by Brazil , Russia, India , China , South Africa) & 13 partner nations are developing the BRICS Bridge payment network to settle transactions using Central bank digital currencies. This might become a big challenge to USD hegemony in future.

 

Sustaining Factors

• Trade Invoicing: A large majority of global trade, even between non-US countries, continues to be invoiced in US dollars, sustaining high global demand for the currency.
• SWIFT System: The USD remains the most dominant currency in the SWIFT global interbank payment system, indicating its ongoing role as the primary medium of exchange.

 

Key risks that could accelerate USD decline

• A sustained loss of confidence triggered by runaway inflation, US fiscal crisis, or inability of the US to roll/refinance debt at affordable rates.
• A concerted geopolitical/financial bloc formation like BRICS etc that shifts trade and reserves to another currency or basket.
• Rapid, large‑scale liberalization and internationalization of China’s financial system combined with confidence in Chinese institutions.

 

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Is this is the beginning of end of Dollar hegemony & consequently US hegemony & domination over global economy & capital markets” ? Lets not forget that we had such changes in Global Foreign reserve currency  & trading currency earlier too( from Portuguese Real in 1450s  to Spain Dollar  in 1530s  to Dutch in 1640s to British Pound in 1780s  historically). Last such change was in 1944 at Bretton Woods meeting with Global reserve & trading currency passing from British Pound to USD , after Britain almost bankrupted after the 2 world wars with Debt/ GDP > 250% . Is USD going the same route in 1-2 decades? Is this the beginning of the end?

 

what is current outlook for US Dollar as a global reserve currency & trading currency for long term(next 10-20 years)?

The long-term outlook (next 10-20 years) for the US Dollar (USD) as the world's primary global reserve currency and trading currency suggests a future of gradual decline in its market share but continued dominance due to structural advantages for probably 1-2 decades . A dramatic or sudden "de-dollarization" event is widely considered unlikely, but the system is evolving into a more multipolar financial system.

The most likely scenario over the next 10-20 years is a "rising tide" where other currencies gradually gain share due to global diversification and the strengthening of their own financial markets, rather than a rapid, shock-driven "unforced error" where the US abruptly loses confidence due to its own actions. The USD will likely remain primary, but with a diminishing share of the global pie.

 

 Some issue/concerns on recent US equity market trends.

·        Big risk is heavy concentration of market growth in a handful of large tech companies, often referred to as FAANG or the "Magnificent Seven". The top 10 stocks, primarily tech giants, represent over 37% of the S&P 500's total value. The "Magnificent Seven" (Google, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) have driven a majority of the S&P 500's gains in recent years. This creates a scenario where if these stocks perform well, the index looks healthy, even if the other 493 companies are struggling

 

·        Magnificent seven stocks are mainly going up , based on their AI related investments and earnings projections (contributing 45-50% of market cap gains of S&P 500 this year )and hence there could be a bubble/ over-hype  situation of they don’t deliver on AI projections.”

 

·        US market cap/GDP ratio(favourite Warren Buffet indicator measuring over-valuation at >100%) has touched a record 222%( 67 Trillion market cap to 30 Trill GDP). This is definitely in over-valuation zone(bubble zone for any other country)

 

·        Is Hyper expectations(hype) over AI leading to bubble in US markets?

 

Pl look at the table below from Economic Times( this week)

Just these Big tech club of 5 companies(Nvidia, Apple, Microsoft, Google/Alphabet & Amazon) , together command a market cap of 18 Trillion(about one third of S&P 500 index market cap) and gained 3.3 Tril (22% up) , representing 40% of market cap gains this year. And all these Big 5 companies are growing on AI related expectations/hype .  Leading US Tech companies have pledged more than 500 Bill $ on AI & data centre investments in 2025 , with projected AI revenues at 217 Bil in 2025 and >1300 Bil in 2032(6.5 times growth in 7 years) , which is > 30% CAGR on revenues in 7 years , which looks like a tall order . What if AI led growth turns out to be a over hyped and bubble ? How will it impact the markets , when market starts looking for projected revenue growth , profitability & cash flow versus real numbers , in few quarters? Would it lead to US market crash , which will have negative impact on other national markets too ??

 

Implications for investors and policymakers

• Investors including retail ones: Review USD assets as core safe‑haven exposures & consider FX diversification benefits — consider allocation to non‑USD assets, hard assets (gold), and regionally balanced portfolios. Hedge USD exposure where appropriate for specific liabilities. Retail investors , specifically ,should be mandatorily investing at least 10-20% of their portfolio on Gold ETF ( It has given better returns in last 5 to 10 years@ 15-18% than equities( Nifty @ 12% & NYSE at 11% CAGR in last 10 years)
• Corporates: Prepare for more multi‑currency invoicing and hedging, especially in Asia‑centric trade.
• Policymakers: US should address long‑run fiscal/debt sustainability, maintain deep markets, and manage geopolitical relationships to preserve dollar credibility. Other countries wanting greater currency internationalization must liberalize capital accounts, strengthen legal/financial institutions, and build market depth. RBI should be significantly increasing its Gold holdings to few more times than current 14% , like US & other big developed countries.

• Indian economy & equity markets are on the threshold of doing very well /outperforming in medium term (next 1-2 years) as well as long term , after consolidating in last 12 months.  I have given some relevant recommendations including some strong sectors and trends for India  in my last blog . Putting the link below

https://indiavalueinvesting.blogspot.com/2025/10/current-equity-market-outlook-abhi-to.html

 

Hope you found it interesting , productive & useful. Pl provide your feedback/inputs

Happy Investing.

Cheers

Amardeep

 

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