India's equity market may be getting the thumbs up in many analysts' 2017 outlooks, but it might not be as protected from global trade turmoil as many believe, a fund manager said.
Investors in emerging markets generally have become worried about the prospects of a trade war after the surprise win by U.S. President-elect Donald Trump. While Trump's rhetoric primarily targeted China and Mexico, other countries were widely expected to get caught in any crossfire. More recently, the Trump camp has floated the idea of a broad 5 percent tariff on imports into the U.S.
Analysts have generally pointed to India as likely insulated from any trade wars because of its economy's mainly domestic drivers and strong consumption growth, with many advising going overweight on the market in 2017.
But Sat Duhra, a portfolio manager at Henderson Global Investors, told CNBC's "Squawk Box" on Tuesday that expectations for India to remain insulated were overdone. Henderson Global had 100.9 billion pounds ($123.8 million) under management at the end of September.
"There's not a doubt that there will be an impact from external events," he said. "[If] you look at the large-cap companies in India, 40 percent of their earnings are overseas."
Duhra pointed to other reasons that optimism over India may be overdone, noting that earnings growth forecasts for the subcontinent were at around 15 percent for the next two years.
"Last year, it was barely a few percent, and that was not from top line growth, but because of margin improvement from commodities," he said.
Over the past couple years, commodity prices had tumbled, but in the past few months, they've recovered.
"Now that commodities have moved the other way, I think you'd be lucky to get 5 percent [earnings] growth. It's going to be a low number," he said.
Duhra also noted that India's demonetization program, which will remove 500 and 1,000 rupee bank notes from the financial system, or around 86 percent of its currency, could have a big, short-term impact on economic growth and corporate earnings.
"It's a cash society. So when the man on the street hasn't got the cash to go and spend and buy everyday goods, of course there'll be an impact," Duhra said. "And you see companies reporting now on big downgrades on near-term sales numbers."
But even without headwinds from demonetization and the country's introduction of a goods and services tax (GST), "it's never been a good value market," Duhra said, saying that not only were valuations too high, but that stocks were generally priced for perfection.
Other analysts were more positive on India.
Morgan Stanley, for one, tipped India as one of its top emerging market picks.
"After the short-term negative impact from currency replacement, we expect growth to get back on the recovery path from the second quarter of 2017, with support from consumption and exports," Morgan Stanley said in an early December note. "The equity markets are looking attractive and appear poised for double-digit returns in 2017."
While the investment bank only forecasts earnings growth of 2.5 percent on-year for the Sensex index in fiscal 2017, it expected that would just to 18 percent for fiscal 2018.
—By CNBC.Com's Leslie Shaffer; Follow her on Twitter