Trump’s win boosts confidence in US economy; Emerging markets concerned over strengthening dollar — expert advice

The Indian stock market was taking a beating in the last month,with funds reportedly shifting to other countries such as China and Japan. We are bearing a lag effect of ‘Yen Carry Trade’ which had impacted the global market in July. This week too, we started on a weak note, in contrast to the positive performance observed globally. This underperformance, particularly ahead of the US election, stands out as the global market remains relatively stable. A contributing factor is the revised Q2 GDP growth estimate, which the RBI initially forecasted at 7.2% YoY but recently lowered to 7.0% YoY in its October policy update. 

According to the latest market survey, the forecast is estimated to be much lower in a range of 6.4% to 6.8%. Given that Q1 was 6.7% and Q2 is estimated to be similar, there is a risk that FY25 GDP growth is downgrading. The decline in Q1 and Q2 is attributed to reduced government spending due to the national election from April to June and eight state elections (Andhra Pradesh, Arunachal Pradesh, Sikkim, Odisha, Jammu & Kashmir, Haryana, Maharashtra and Jharkhand) during June to November. Additionally, the global economy is slowing in 2024 due to hyperinflation and rising interest rates, while the domestic economy is experiencing a drop in urban demand.

This leads to the problem that India is trading at an excess valuation compared to the peers, at 80% premium to other EMs. This has exacerbated the ongoing sell-off by FIIs, driven by worse-than-expected Q2 corporate results that have dampened investor sentiment. Example: Currently the Nifty50 index Q2 earnings growth is projected to be in a low single digit of 0 to 5%, down from the preview forecast of 5% to 10% YoY.Earnings downgrade risk has increased, and the 15% earnings growth forecast at the beginning of FY25 has been revised down to 8% to 9%. Despite heavy FII selling, the market remains supported by equivalent buying from domestic investors, with the hope that earnings will recover in Q3 and Q4. 

‘Trumpononics’ policy

This week, the stronger-than-expected mandate win for Trump has boosted the global equity market. In India, after a sell-off on Monday, the broad market performed well in the first two days, rising by 2.3%. But the momentum diminished in the last 2days; WoW was down by -0.66% from the last week Mahurat closing. A similar trend was seen in other peers as the euphoria subdued and looking forward with high anxiety on the ‘Trumpononics’ policy, which will be unleashed in the next 1-2months.

The US market continues to thrive, having risen by 5% since October 4th. This surge is driven by confidence that the new policies will benefit the US economy, aligning with the “America First” slogan. Countries with significant trade deficits with the US, such as China, Mexico, Vietnam, Germany, and Japan, are expected to be most vulnerable to changes in trade policy. India is in 9th place with a deficit of 5.8% as per CY2023 data. Generally, today the US stock market is in a boom in anticipation of tax cuts and high government spending. Which is coming as a shot on the arm for equities, fortunate as the US valuation is on a high range. 

EMs are concerned that the new economic policies will likely strengthen the US dollar. Trump’s economic strategies aim to enhance America’s economic outlook, potentially at the expense of the rest of the world. This could lead to a reduction in foreign investment, thereby decreasing the availability and supply of USD. The world economy may slow on deglobalisation on a high tariff trade, currency volatility may increase and hike geopolitical uncertainty, appreciating USD as a haven currency.

US yield is forecast to be on the upside due to immigration control and high inflation led by high government spending. World inflation and yield will also remain in the upside range. This could lead to the depreciation of other currencies like Asian peers. India is also expected to do so, but high inflow from the global bond index will provide a respite. Also given the strong position of the RBI forex position, INR is expected to be steady compared to other Asian peers by curbing volatility. 

For India, a potential advantage is that a decline for China could translate into increased outsourcing opportunities, given Trump’s anti-China stance. However, a setback could arise if China responds to reduced US demand by increasing dumping in other countries, including India, which could negatively impact domestic corporates. A safe harbour for India could be that personal ties between Trump and Modi are found to be cordial, limiting trade policy fallouts, rather than sector specific issue. India’s high immigration to the US, second only to Mexico, could be an alert in the background. However, the issue is likely to be a low back runner as the issue was improvised during the Trump 1st term with increase in minimum labour wage cost.