The Case for a Historic Reallocation to Emerging Markets | Sony Kapoor

0:00Demetri Kofinas:What's up, everybody? My name is Demetri Kofinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and learn how to think critically about the systems of power shaping our world. My guest in this episode of Hidden Forces is Sony Kapoor, an economist, policy advisor, and investor who began his career in leveraged finance and derivatives at Lehman Brothers and went on to advise roughly 20 governments, including Norway, Sweden, and Germany, as well as some of the world's largest sovereign wealth and pension funds.

0:38Demetri Kofinas:Sony and I spend the first hour of this conversation discussing the case for a great rebalancing of global capital away from the United States, the structural forces that drove the outsized concentration of international portfolios into American assets, and why the current administration's erratic policymaking has made that overexposure impossible to ignore. We also take a deep dive into India, its evolving relationship with the United States, how its elites and ordinary citizens perceive America under the Trump administration, what it has learned from Beijing's development model, and the remarkable optimism and energy that pervades Indian society in contrast to the declinism that has gripped Western countries.

1:18Demetri Kofinas:The second hour is devoted to a conversation about the broader investment case for emerging markets, why relative risk across currency, political, fiscal, and institutional dimensions is converging between developed and developing economies, why growth and demographic tailwinds favor a dramatic reallocation of global portfolios toward emerging markets, and whether artificial intelligence can sustain America's virtuous capital reinvestment cycle, or whether the rest of the world's rapid adoption will erode that advantage. We also discuss the geopolitical complexities that shape these investment considerations, from India's deep military dependence on Russia to the fraying of the US-led international order and what it means for strategic autonomy across the developing world.

2:02Demetri Kofinas:If you want access to all of this conversation, go to hiddenforces.io slash subscribe and join our premium feed, which you can listen to on your mobile device using your favorite podcast app, just like you're listening to this episode right now. If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, which includes Q &A calls with guests, discounted access to third-party research and analysis, and in-person events like our intimate dinners and weekend retreats, you can also do that on our subscriber page. And if you still have questions, feel free to send an email to info at hiddenforces.io and I or someone from our team will get right back to you.

2:45Demetri Kofinas:And with that, please enjoy this incredibly timely and valuable conversation with my guest, Sonny Kapoor.

2:55Demetri Kofinas:Sonny Kapoor, welcome back to Hidden Forces. Thank you for having me again. It's great having you back on the show, Sonny. I brought you on the podcast again because you recently published an article in Bloomberg that fit right into our wheelhouse. And I felt like it was also a really good addendum to the conversation we had last time you were on the show, which was prompted by two papers you'd written, Winter is Coming and the Case for a Great Rebalancing, in which you argued that global capital had been increasingly misallocated due to factors such as the growth of passive indexation, maladaptive benchmarking, and an excessive focus on short-term performance at the expense of long-term returns.

3:36Demetri Kofinas:And I certainly encourage people to go back and listen to that conversation after hearing today's discussion, which as I said, was prompted by your most recently published article in Bloomberg titled Global Capital's Break with the US is Long Overdue. Is it fair to say that this article falls in the category of the sell America trade, a narrative that has gained significant mind share, I would argue, since early 2025, but which you were arguing for much earlier? Is that the correct mimetic framework for thinking about what we're going to talk about today? I think sell America perhaps is, I mean, it's a nice turn of phrase, captures imagination, that's descriptive, makes a clear crisp point.

4:21But that is a bit of an exaggeration by several measures, right? I mean, so there's no one in the world, definitely myself included, who doesn't recognize that the American economy is exceptional. It's exceptionally innovative. it's by far the largest sort of consuming powerhouse in the world, great innovations, massive companies, deep capital markets, all the rest of it, right? So many of the virtues that drew so much capital to the United States in the first place remain. But the question is not whether it's worthwhile being exposed to America or not. It definitely is. But the question is, what is a reasonable magnitude of that exposure?

5:09And every year of outperformance of American markets, both because of simple arithmetics between flows and stocks, so the higher the returns, the larger the increase in market capitalization, the larger the exposure of international investors to the United States became, even if they didn't put new money into the US, right? But the second point, because of that outperformance, and because it was attractive, a lot of new money was actually sucked in. And so the share of the US of global equity markets, listed markets, bonds, private equity, et cetera, just kept rising and rising. And there was going to be a level at which the pressure differential between where the US lay, what metrics its stocks exhibited, what the PE ratio, et cetera, was, what the forward earning expectation was, differed so substantially from the rest of the world that it was simply not going to be sustainable.

6:19And I think that level, in some sense, really ought to have been reached before, but belatedly that level has arrived. And what was Trump's contribution within all of this is, because as we know, I think it was Keynes who said that the markets can stay irrational for longer than I can stay solvent or something to that effect. And so this could very well have gone on another year or two, maybe even three years, who knows. But the very clear signaling from this American administration right from the start about treating enemies and allies alike shoddily, public humiliation, left, right, and center of domestic opponents, foreign opponents, and allies again, potential threats against the sovereignty of a NATO partner, one, which I think on a per capita basis has lost more soldiers than almost any other country in US-led wars in the Middle East, Denmark.

7:28And of course, attacks against domestic institutional independence, particularly against the Fed. And it's just been an accumulation of taking pot shots left, right, and center at anybody who dared defy this administration that made it impossible for investors to ignore how important, how huge, how big their exposure to what is essentially a single point of failure had become. So as this administration concentrated power within the United States, as the ad hoc-ness of policies, be it on tariffs, be it on industrial policy, be it on security alliances, et cetera, changes week to week, day to day, tweet to tweet, truth social to truth social, it became impossible for any half-rational person to fail to address the point that more than half of their portfolios are exposed to the whims of one very idiosyncratic man.

8:38And so it forced people to take a fresh look at their portfolio exposure. And the answer, which really ought to have, again, been very clear already, became unavoidable, that this is far too high in exposure. And one doesn't need to start selling America, but it begins by stopping allocating new money into America. And then at the margins, because the US Treasuries, for example, remains by far the single largest asset class, the most liquid, it's impossible for any sizable investor not to be substantially exposed to US Treasuries. but at the margin, trying to reduce one's exposure from, let's say, 20 % of the portfolio to 18%, 17%.

9:26That sort of behavior has begun. So it's not sell America, it's rebalance away from America, diversify away from America.

9:34Demetri Kofinas:How big is the gap between the consensus among foreign investors and the perception of American portfolio managers, allocators, and financial advisors, would you say? I haven't looked at the numbers recently, but it is only natural that there is a gap between American and foreign investors. So what is often not part of the narrative over the outperformance of American financial assets over the past decade or so is that a non-negligible part of that performance came from a strong and rising dollar. So the dollar has been just when Trump took office. I think on a trade-weighted basis, the dollar was at one of the highest points in at least recent living memory.

10:27And so for foreign investors, a single point of differentiation from the United States, the biggest one is that a dollar exposure is a real risk they need to bear or hedge. And as people have taken into account the real possibility of things as they turned out last year, of the dollar falling and continuing to fall, the demand for hedging has skyrocketed along with the price for hedging. So hedging, hedge dollar exposure now for foreign investors is very expensive and unhedged dollar exposure for foreign investors is very risky. So it's only natural that American domestic allocators will be more comfortable with a higher allocation to US assets because they don't have the dollar exposure compared to foreign investors.

11:20Demetri Kofinas:So how much of this is a story about a secular weakening of US sovereign debt as an international reserve asset, even if the dollar remains the principal international currency? I think it's definitely part of a piece. And the reason that we are seeing everything all at once is because we saw the converse for the past decade, decade and a half. So the outperformance of American financial assets wasn't just limited to US listed equities. It also very clearly showed up in private assets. It clearly showed up in fixed income and bonds. And on the downside, all of those factors of which the rising risk premium being attached to US treasuries, again, it's not a dramatic increase, but it doesn't take much of an increase to begin to register in terms of the new inflows into US fixed income assets versus inflows into other assets such as gold, which are considered to be potentially competitive assets with a safe haven status.

12:36So the credit premium credit risk being attached to US treasuries is definitely part of the piece. The decline in the dollar is definitely part of the piece. The very high degree of concentration of returns from US S &P 500 companies, I think the top seven accounted for, what was it? 50 % of returns over the past three years or so. And they are all related. And in some cases, as with the strong dollar and the rising dollar in the past. They have contributed to that outperformance. And so all of those tailwinds that served to make the US share so completely outsized compared to its GDP, its contribution to global growth, innovation, trade, et cetera, are now starting to become headwinds.

13:40Demetri Kofinas:How much time do you spend in India? We're doing this conversation. Last time we spoke, you were in Norway where you're based. You're doing this now from Delhi. How much time do you actually spend in India? I come at least three or four times a year. And now I'm here both on family holiday, but also for the AI summit that's happening now. So would you say you have a good sense of the zeitgeist in India as it pertains to, I mean, among other things, the perceptions of ordinary Indians of the United States? I would say so. I mean, I don't necessarily hang around with everyday Indians in the times that I come here, but I think I have at least got some sense, yes.

14:23Demetri Kofinas:So what is that perception and how has it changed in your experience? So from the time I was a kid and I grew up partly in India, it's sort of gone through various cycle. So broadly, the perception of the US has been relatively positive, but there have been periods where US reputation has taken a beating amongst the Indian mindset, and I think deservedly so. Part of it was historically due to the Cold War realpolitik where the US significantly supported and gave F-16s to Pakistan and all the rest of it, right? Part of it is related to, and we're going quite far back in the day, but I think was it Nixon who was on the record having called Indira Gandhi, who was, I think, the second or the third prime minister of India in the 1970s, excuse my language, B-I-T-C-H.

15:25And there's been US policy towards India -

15:30Demetri Kofinas:We supported Pakistan after 9-11 and Musharraf and all of that. It hasn't been terrific. It hasn't been consistent. But given the fact, so I went to one of the elite engineering schools in India, the IIT, the Indian Institute of Technology, and roughly about a third to half of my classmates, as was generally the case, end up in the US, either at universities with teaching, tenured positions, or mostly in Silicon Valley or one of the industrial giants. And I would say, I think at least three or four of them are sort of Silicon Valley billionaires now. So over time, the pace of this Indian elite going and making massive contributions to the American economy has been picking up.

16:22And many of those people have come back. So many people, especially amongst the elite, have deep family links. Roughly half of my family is American. And that has meant that particularly over the past 15 years or so, the US reputation in India, even amongst ordinary Indians, not just educated middle classes, has been rising. And it's quite a deeply held, very positive image. And even under Trump 1.0, where US policy was inconstant and a bit divisive, it didn't do that much damage to American reputation in India. But I think this last year, 2025, has left a very deep crack in the glass. And it's hard to see how it can be fixed anytime in the foreseeable future.

17:17So the ad hocness of Trump's stance over tariffs imposed in India, which were amongst the highest, right? The clown show over H-1B visas and the sometimes nearly racist rants and policies, which, from which I think Indian Americans as the supposed sort of model minority thought they were insulated. They found out much to their chagrin that they clearly were not, Anybody could come into the crosshairs of the people going down this path. And so there's been a proper real breach of trust as far as I think Indians are concerned, both within the elite and ordinary Indians that has come about over the past year of what is seen to be American misbehavior and bullying tactics of India.

18:15So I think, you know, for now with the trade deal, things have become a bit more normalized. If there's, you know, further agreement on H-1B visa, if some of the more nakedly anti-immigrant policies are either, you know, defeated at the Supreme Court or Congress sort of takes action, they will slowly heal. But there's a definite rift, a breach that's going to take a long, long time to heal. That mistrust will not go away easily.

18:46Demetri Kofinas:So in the world that I grew up in, the antipathy that existed to the extent that it existed for America abroad seemed to stem from a perception that America was an unaccountable superpower that used high-minded ideals and pluralistic and multicultural rhetoric to mask its pursuit of empire backed by hard power, that the issue was more the perceived hypocrisy, in other words, of American foreign policy. Are the elites in India primarily upset that they've now become a target at times of the very bullying that you mentioned earlier? Or does the concern really extend beyond India's own experience towards the larger frame of the international system under the capricious leadership of this administration and the wave of populism that it rode in on?

19:33Demetri Kofinas:In other words, does the chaotic nature of the policymaking that seems to be emanating out of Washington represent the greater concern for New Delhi today? I think if you follow the lines of ordinary Indians, for the most part, isn't that much bandwidth given the day-to-day challenges of coping with normal life, poor infrastructure, very competitive work environment, so on and so forth. There isn't that much bandwidth to follow the nuances of principled foreign policy. That's more of the pursuit of the foreign policy establishment and the media elite. And I think the primary sort of breach of trust that is felt by the majority of Indians comes from the administration's behavior towards India specifically, right?

20:28So there isn't that much depth of engagement and following up of how capricious Trump has been towards his NATO allies, right? And as much as Trump threatened to annex Greenland, would it have moved Indian public opinion about the United States by more than a percentage here or there? The answer is probably not. Most people simply don't follow that blow by blow account. So it is mostly to do with those two main factors. One is the tariffs. The second is Trump claiming credit for having engineered a ceasefire between India and Pakistan and entertaining the Pakistani head of military service with lunch at the White House, which is unprecedented.

21:25And it was seen to be public humiliation of India. And the third, of course, the mismanagement of the whole H-1B visa and the perceived mistreatment, rising mistreatment of Indian Americans. So I think it's the India specific issues that have contributed to the biggest negative swings in public opinion against the United States here.

21:52Demetri Kofinas:Which counterparty do you think has more leverage in this relationship? And can India afford to be on the outs with the United States? Not suggesting that it is, just in terms of putting this through the, they don't have the cards framework that Trump has operated with in a number of his bilateral relationships. Well, clearly India simply doesn't have the cards that China has had, right? I mean, the rare earths embargo, for example, from China caused immediate pain in the United States and amongst Western allies and was a big factor in bringing Trump to have a more conciliatory stance towards China.

22:38Is there one single issue over which India can exercise that kind of leverage over the United States? The answer is simply not. So at this point, India has a much weaker hand compared to China or even the EU in its dealings with the United States. That having been said, there are advantages to India not being that deeply integrated into the global economy, India being primarily a country where growth has been driven more or less by domestic consumption as a single biggest factor, right? We are not manufacturing powerhouse that has massive exposure to trade embargoes, et cetera. And Trump's tariffs did begin to cause pain, certainly in some sectors, but in macroeconomic terms, I think the number is probably, had the tariffs continued at 50%, Indian growth would have been maybe half a percent of GDP lower than it would have been, which when you're growing at 7 % is pain that you don't want, but you can take.

23:56So India has had the capacity and still does to take more punishment from the United States in order not to give in to public humiliation of the kind that I think was felt here. And I think, you know, there's a, in terms of the political constituency, even if more pain were to be inflicted, the political constituency domestically is sort of strong enough to rally the troops, to bring everybody to make sacrifices, not massive sacrifices for the sake of national unity and national pride. So I think given that the US also has relatively limited leverage in the damage it can inflict on India. And of course, the fact that we are having this discussion is itself nonsensical, right?

24:52I mean, it's a marriage that ought to be made in heaven, given the amount of talent that has gone from India to the United States. I think some statistic I saw, I'll need to verify it, is that about a quarter of Silicon Valley firms were founded by Indian ethnic, folks with sort of Indian ethnicity. And I definitely know that a reasonable number of those were founded by my classmates. And given the fact that the US is sort of demographically stagnating and if not in decline. India has got about 12 million people coming into the workforce every single year. Indian share to global growth now year by year exceeds American share to global growth.

25:39We are still a relatively poor country. And I think India fairly soon, if not already, is going to be the third largest economy in the world. And of course, if the United States foreign policy establishment on both sides of the aisle is as paranoid about China as they appear to be, given the amount of noise that comes out of DC, there's only one country in the whole world that allows the United States to have a potential counterweight, and that is India, right? And we have clearly aligned interests. And I think folks in the EU when the United States forget or don't even know that unlike them, who've never been at the receiving end of military aggression by China, India and China actually fought a war over Tibet when India gave asylum to the Dalai Lama and the Tibetans who were fleeing China's occupation of Tibet, I think in 1962, and we were sort of handily beaten.

26:43And the level of mistrust that has existed over the past several decades between India and China, in particular, the Indians being, I think, not entirely without reason, paranoid about China's growing economic prowess, but of course, military expansion, the number of nuclear weapons it has, the assistance it has provided repeatedly to not just Pakistan, but the military junta in Burma, for example, in Myanmar, the strategic ports they have tried to get in Sri Lanka. So it's a sort of surround strategy. So if there's one country that has a real reason besides Taiwan to be paranoid about Chinese military expansionism, it's actually India.

27:35And to basically, you know, deliberately shatter what had been a wonderful, increasingly strong alliance, not just economic, but also military between India and the United States within the space of a few months. I mean, it's the biggest sort of, you know, shooting in oneself in the foot that I can think of in recent foreign policy. So it's a terrible, terrible, terrible thing for the United States to do out of its own self-interest. And it's not great for India either, but it wasn't India that fired the shots in this particular conflict. Yeah.

28:16Demetri Kofinas:And speaking of firing shots, it wasn't it, what was it, five and a half years ago that there was a border clash between the Indian army and the People's Liberation Army that led to several deaths? Yeah. I mean, it's again, in geoeconomic terms, it's pretty shocking. So here you have two giants, 1.4 billion people each with a border that runs into probably, I don't know, 1 ,000, 2 ,000 kilometers. And given the size of these economies, there's more or less almost no trade that goes on between them, right? There's not massive contingents of Chinese engineers and scientists coming to India. There's not that many Indians that go to China.

29:04And since that conflict you mentioned, where there were a lot of, maybe even in the hundreds, but definitely in like 50, 60 deaths of soldiers on both sides, direct flights were suspended, right? So we did not have for the past five years, any direct flights between the two largest countries in the world, which share more than a thousand kilometers of border, right? And the reason they have begun to sort of talk again, the reason that relations have been, you know, have been toying a bit, the reasons that the direct flights have been restored is because of Trump's aggression towards both India and China.

29:48So I don't know if this was a goal of foreign policy to bring India and China closer together, but it's definitely something that is happening directly as a result of recent American foreign policy.

29:59Demetri Kofinas:How do Indians, again, it's tough to talk about a country of a billion people in this sort of just general sense. So maybe we should try to narrow the focus to maybe India's elite or those in charge of, in one way or another, influencing the direction of Indian foreign policy. But how do India's elites view the rise of China and Chinese power? There's always been a very strong element of China envy amongst the Indian elite. Now, I was just listening to something on my flight from Bahrain last night. Is it I'm Chinese? There's like a trending social media hashtag from TikTok or something where people are, you have politicians, you have ordinary citizens, et cetera, either those who've been to China or sort of just talking about this with sipping a cup of Chinese green tea.

31:05but of massive envy about China's remarkable ability to build infrastructure. And of course, China has been pushing that narrative too. I think there's a reasonably famous media coverage, I can't remember if it was a video clip or not, of President Xi pouring tea for Putin in one of the high speed trains and the train was clocking 301 kilometers per hour and not a drop was spilled, right? And there's these sort of memes flooding. So this is something that's a relatively recent phenomenon in the West, in the US, in the EU. But this has been something that's been part of the Indian mainstream discussion, the Indian elites of China envy for at least the past sort of three decades or so, right?