With the Trump administration for next four years, should Indian investors rethink their strategies? The US is likely to break away from traditional ways of governance and policy-making, charting a different path than the rest of the world. Investors can expect a lot of chatter surrounding the Trump administration over the next four years. Find out why you should ignore short-term noise and focus on long-term goals
It is a political comeback like none other. Armed with a sweeping mandate from the American public, President-elect Donald Trump is set to regain arguably the most powerful throne in the world. The high-decibel, bitterly contested US general election is now over, and global markets are bracing for what lies ahead. After the initial riskon rally following Trump’s resounding victory, some anxiety is evident as the domestic market gives up its gains. Investors can expect a lot of chatter surrounding the Trump administration over the next four years. Should you take cues from the noise and refine your investing strategy?#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;} Volatility, stronger dollar
Trump 2.0 is largely expected to play out in a similar vein as his previous stint at the helm. The US is likely to break away from traditional ways of governance and policy-making, charting a different path than the rest of the world. Vinit Bolinjkar, Head of Research at Ventura Securities, points out, “Trump’s administration has previously shown a willingness to shake up existing norms. So we might see economic indicators like inflation and interest rates in the US diverge more sharply from global trends.” This divergent path will clearly bring elevated uncertainty to global financial markets. Prashant Tandon, Executive Director, Investment Advisory, Waterfield Advisors, insists, “The Trump sweep will ensure that macro volatility will remain elevated in the foreseeable future.”
His election plank of putting ‘America first’ will form the centerpiece of the new policy. This means a more inward-looking US. Trump will use tariffs to address the US trade imbalance with other nations and boost local manufacturing. Nitin Aggarwal, Director of Investment Research and Advisory at Client Associates, outlines, “A Republican-led government under Trump could significantly reshape trade dynamics, with heightened tariffs and a more protectionist approach to international trade.” Prima facie, Trump is positive USA, but negative rest of the world, suggests AngelOne Wealth. “This seems like a party in the USA, especially for the equity investors, but with global tariffs, global growth is likely to slow down,” surmises the wealth management outfit. “Emerging markets are even less likely to find favour with asset allocators, especially in the light of possible worsening in global geopolitics and trade,” indicates Sanjeev Prasad, Managing Director and Co-head, Kotak Institutional Equities.
Higher inflation, fiscal stress in the US
The US fiscal deficit and debt are likely to expand over the coming years.
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Notably, Trump will be taking over the reins at a time when the US Federal Reserve appears to be on track for a ‘soft landing’ of the US economy. Previous fears over a descent into recession seem to have blown over. However, planned higher tariffs on imported goods and higher government spending are likely to be inflationary and stretch the US’ already bloated public debt. This could possibly delay further rate cuts by the US Fed, which in turn could put a lid on money flow to emerging markets like India. This could keep domestic stock prices weak for some time. Aggarwal remarks, “If the US delays interest rate cuts to combat inflation, foreign portfolio investment (FPI) flows to India could weaken. There is typically a negative correlation between US interest rates and FPI inflows to emerging markets, which could put further pressure on India’s capital markets.”
Further, Trump intends to slash corporate taxes from the current 21% to 15% for companies that produce in the US. The likely boost to local manufacturing and jobs, along with protective tariffs, is positive for the US dollar. Experts believe the USD will strengthen in the coming years under Trump. Madhavi Arora, Lead Economist, Emkay Global Financial Services, asserts, “We maintain that the Trump premium is not yet fully baked into the US dollar, and the recent upmove owes to higher re-pricing of US Treasury yields. While Trump has vocally supported a weaker USD, we think his policies would lead to stronger USD amid its anti-cyclical character.” This also implies a natural weakening bias for the rupee in the near term. Weak FPI inflows could put further pressure on the rupee. The rupee has already hit a record low of 84.4 against the dollar. However, the USD will possibly weaken over the medium term owing to higher US government deficits.
Contradictions for India
With these anticipated policy shifts, broader contours of the ‘Trump trade’ are visible. What is apparent is the many contradictions it holds for India. Any potential lowering of corporate tax rates could result in US businesses reinvesting the funds in capex and IT spends. In addition, a weaker rupee will benefit IT and pharma, observes Axis Mutual Fund. At the same time, some tariffs may get directed towards Indian imports, affecting domestic exporters. “Indian generic drug manufacturers could face increased tariffs on their exports to the US,” points out Aggarwal. IT companies may have to contend with Trump’s stricter immigration rules. “Due to the aggressive stance on immigration, Indian IT companies may face challenges in obtaining H-1B visas for their employees, leading to higher subcontractor expenses and an increase in investments to build near-shore delivery centres,” indicates Antique Stock Broking.
Stocks and gold rose in Trump’s last term
The rupee weakened marginally against the dollar during his tenure.
India could benefit from any re-orientation of the global supply chain away from China. “The Trump win and increased tariff on China imports would mean ‘China plus one’ de-risking can accelerate and may benefit Indian chemicals, electronics manufacturing services, auto ancillary, wires & cables, tiles, solar cells and module exporters,” suggest analysts at JM Financial. However, a slowdown in overall global trade would have negative repercussions for India too, states a CARE Ratings report.
Note: “As global growth and inflation fluctuate, India’s investment strategy may also need to be redefined.”
MADHAVI ARORA
LEAD ECONOMIST, EMKAY GLOBAL FINANCIAL SERVICES
Trump has resolved to reduce energy prices by increasing domestic fossil fuel production. His administration is also likely to end delays in permits and leases for drilling and remove all the hurdles surrounding oil and gas projects. “Increased US oil production and easing of global crude oil prices would be a positive for the Indian economy, as India’s oil import dependency is high at around 85%,” indicates the CARE Ratings report. Lower crude oil prices will benefit domestic oil marketing companies and city gas distribution firms. Meanwhile, the 10-year US treasury yield began rising in the lead-up to the US elections, as markets started to price in the likelihood of a Trump presidency. Cumulatively, the 10-year UST yield has increased by more than 50 bps over the last month (up to November 11). Yields are expected to remain higher as Trump’s policies are likely to spur inflation. This will keep further rate cuts on the backburner for some time. “The ‘higher for longer’ scenario in the US has also gained momentum following Trump’s electoral win, with the possibility of higher fiscal deficits and tariffs, to go with the upside surprises in the US growth, labour and inflation,” observes Arora.
Indian, US equity markets have diverged
The US poll results have boosted US stocks even as domestic stocks have weakened.
Indian bond yields have historically moved closely with US yields. However, domestic bond yields have remained quite stable— albeit with an upward bias—for the entire up-move in the US bond yields. The 10-year government bond yield has fallen by 40 bps since the beginning of the year. The RBI is likely to defer rate cuts as it grapples with sticky inflation at home, as well as potential risks posed by imported inflation from a sliding currency and higher US yields. The central bank remains in a ‘wait and watch’ mode, for now. “While the 2024-25 rate-cut call is tricky now, we are in for a shallower rate-cut cycle in India ahead, following the Fed,” Arora argues. As such, further gains in long tenure bonds are likely to be modest. “Incremental gains in long tenure bonds would be in anticipation of rate cuts. Stable inflation and possibility of lower growth will lead to a shallow rate cut cycle of 50 bps in the next six months,” states Axis Mutual Fund in its note. “We believe investors can have a sweet spot in a 3-5-year range, while using the current yield spike to build long duration portfolio for performance in the longer term,” remarks AngelOne Wealth in a note.
Note: “There may be shortterm fluctuations, but these present strong opportunities for investors with a longterm view.”
VIKAS GUPTA
CEO & CHIEF INVESTMENT STRATEGIST, OMNISCIENCE CAPITAL
Looking past Trump
Investors clearly will have a lot to digest in the coming years as the Trump administration unfolds. Volatility will remain elevated and asset prices will fluctuate amid growth shocks. The sustained equity market rallies of recent years may not be seen for some time. “We have long said that higher interest rates are a key part of the new global regime change. A multitude of shocks have to be confronted concurrently and need to be dealt with promptly,” contends Arora of Emkay Global, whose equity strategy team believes that Indian equities will time-correct through March 2025 with extreme volatility. This calls for a more calibrated approach. “We believe that as the world navigates the imminent period of higher variability in growth and inflation, and probably redefines the conventional investing playbook, the India investing strategy may also need to be redefined,” suggests Arora.
Dollar index surged in wake of Trump win
Rupee is likely to see a weakening bias in the coming years.
However, analysts warn not to react too strongly to initial narratives around the Trump ascendancy. “For Indian investors, making investment decisions based solely on Trump’s presidency would be an overreaction, as no sector is likely to experience extreme gains or losses directly from it,” insists Kush Gupta, Director, SKG Investments and Advisory. Some analysts reckon that the market has largely priced in the risk of an expansionary fiscal policy and tariff on inflation, yields and dollar entirely too soon. The incoming administration’s actual policy shifts may yet take investors by surprise. “We believe that it is too early to assess the implications of Trump 2.0 and broadly trust that ‘economics will Trump politics’ given the high fiscal deficit and debt levels as compared to Trump 1.0,” reckon analysts at Antique Stock Broking. AngelOne Wealth submits in its report, “A lot of narratives may shift when numbers come into play as and when policies are formulated.” Vikas Gupta, CEO and Chief Investment Strategist, OmniScience Capital, believes Indian and other emerging markets could begin to gain traction as investors recognise that Trump administration may be more sophisticated and economically strategic than initially anticipated.
US bond yields have risen sharply
The Indian bond yields, meanwhile, are holding firm.
Meanwhile, any market upheavals present an opportunity for discerning investors, say experts. Gupta of OmniScience Capital argues, “Anticipated changes in trade policy and economic direction may introduce short-term fluctuations in the stock market, but present strong opportunities for investors with a long-term view.” Over the medium-long term, domestic factors will assume greater significance in influencing asset prices. Aashish Somaiyaa, CEO, WhiteOak Capital AMC, affirms, “Political formations can only cause headwinds or tailwinds in the near term, but in the long term, our markets will deliver what our economic performance and more importantly corporate performance delivers.” Ashish Gupta, Chief Investment Officer, Axis Asset Management, argues, “Earnings outlook and valuations remain crucial for India, and the long-term performance of Indian equities is more influenced by the domestic economy than by global factors.”
Domestic inflation is on an uptick
The RBI will hold off starting the rate cut cycle until inflation is contained.
Experts maintain investors should remain focused on latent risks in their own portfolios rather than obsessing over global events. Somaiyaa insists, “The risk is never in the markets; risks are in investors’ portfolios. Hence, the focus should be on individual asset allocation and goals over noise from political developments in the USA.” Krishna Appala, Senior Research Analyst, Capitalmind Research Investment, insists that accepting volatility as a natural part of the market journey is key to thriving in the long run. “Returns follow a cyclical pattern and, as investors, it’s crucial to manoeuvre through these cycles, endure the declines, and take advantage of the recoveries. Over time, the ability to withstand the downturns and excel during the upswings is what drives long-term success.”
US has kick-started rate cuts
India’s central bank is holding back on rate cuts, awaiting clarity on inflation.
FII activity may remain muted initially
Stronger US dollar and economy may see foreign investors invest selectively in the emerging markets
Note: “The focus should be on individual asset allocation and goals over noise from developments in the USA.”
AASHISH SOMAIYAA
CEO, WHITEOAK CAPITAL AMC
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This story originally appeared on: India Times - Author:Faqs of Insurances
