Can Donald Trump’s pro-US policies be counter-productive for India? Most market observers believe that Emerging Markets may see some underperformance compared to the developed markets and the dollar strength may continue in the near-term.
The US markets have been on a firm footing buoyed by President-Elect Donald Trump’s victory. However, what’s the implication of the Republican Party gaining control over US arms and Policymaking for global markets at large? Well, most market observers believe that this augurs well for US markets as well as the US dollar. For India, this could mean that the current trend of FII outflows may continue for a while now and the dollar’s outperformance is unlikely to abate either.
Kotak Institutional Equities believes that markets have already factored in higher earnings for the US market and a stronger US dollar. JM Financial corroborates that lower corporate taxes for local manufacturing could be a key positive for US businesses and may be instrumental in driving capex and jobs. However, this can also increase the US fiscal deficit and keep interest rates high. The impact of higher tariffs on China also needs to be observed.
1. Higher earnings for the US market
The Republican Party’s win is expected to trigger directives that are directed towards “pro-growth economic policies, such as lower tax rates for corporations and individuals and a higher focus on domestic manufacturing. The market has already factored in higher earnings for the US market,” as per an analysis by Kotak Institutional Equities. According to JM Financial, this indicates that “lower corporate taxes for local manufacturing could be a positive for US businesses. It will also drive capex and jobs. However, this can also increase the US fiscal deficit and keep interest rates high. Higher tariffs on China and the rest of the world could be inflationary.”
2. Stronger US dollar
“The US dollar is likely to stay stronger in the near term. However, it will weaken over the medium term,” stated Kotak. So far the dollar has strengthened significantly against most global currencies on expectation of a higher deficit in the US economy. The Dollar Index is around the same levels as seen during COVID-19 times in early 2020. Rupee meanwhile hit fresh all-time lows against the dollar.
3. FII outflows- Will EMs fall out of favour?
Developed markets are expected to see renewed buying interest. With the MSCI World Index trending significantly higher than the MSCI EM Index, it can be assumed that Foreign Portfolio investors are rebalancing their portfolios and allocation across global markets is being realigned. Kotak Institutional Equities pointed out that, “EMs are even less likely to find favour with asset allocators, especially in light of likely worsening in global geopolitics and trade. FPI outflows from India may accelerate in the near term, given the dominance of passive inflows in FPI flows. Lastly, any large fiscal stimulus from China to offset the negatives of higher US tariffs on Chinese imports could be a further negative for FPI flows into India.” So far foreign investors have sold nearly Rs 20,000 crore worth of shares in India in November after a record sell-off of nearly Rs 94,000 crore in Indian equities in October.
4. Higher Tariff on China
According to Kotak Institutional Equities, “The new US administration is likely to focus on a tariff-driven approach to rebalance the large US trade deficit. The worst-case situation could see meaningfully higher tariffs on goods imported from China and moderate tariffs on goods imported from other countries.” So what does that signal for India? Observers believe that Indian exports may benefit at the margin from a differentiated tariff regime, “but the net benefit will depend on its competitiveness versus on shoring and exports from other economies,” stated the Kotak report.
Moreover, the markets need to factor in higher bond yields and a stronger US dollar in the near term.
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