Market rebound in sight as Donald Trump leads in US presidential race

The reason for the rebound will be short covering as institutional investors and proprietary traders have hedged their portfolios or taken naked shorts, according to analysts.

Early counting gives Trump a lead with 172 electoral votes against 81 for Kamala Harris. A total of 270 votes are needed for a win.

This resulted in Indian markets trading up three-tenths of a per cent after the opening at 9:15am. The Nifty traded up 62 points at 24,275.60, while the Sensex gained 227 points to trade up at 79,703 at the opening.

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"A Trump win could boost sentiment in the very near term, but that won't be a long-lasting move, at best a week or 10 days before fundamentals take over," said ace investor Shankar Sharma.

The short-term boost

The benchmark Nifty and the Sensex have both headed toward correction territory, which is defined as a 10% fall below highs.

The Nifty, as of Tuesday, settled at 24,213.3, 7.85% below its record of 26,277.35 on 27 September. The Sensex closed at 79,476.63 on Tuesday, 7.6% below its all-time high of 85,978.25 on 27 September.

The wealth erosion led by FPI selling since last month's record high has been to the tune of ₹33 trillion as of Tuesday. The market cap of 5,525 firms on Tuesday stood at ₹446.10 trillion, down from ₹479.10 trillion after FIIs sold shares worth over ₹1.1 trillion in the cash market last month.

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This month, too, they remain net sellers of ₹8,905 crore through 4 November. While DIIs have matched their selling, most FPIs and prop traders are net short on index futures, too. As Trump inches closer to victory, these shorts could be covered, resulting in a rebound of oversold markets, predict analysts.

"A Trump victory may give a short-term boost to global markets, but we will have to wait and see," said Nilesh Shah, managing director of Kotak Mahindra AMC.

"Trump has announced a higher tariff imposition on Chinese goods. India could be a beneficiary if we capture some share from our Himalayan neighbour. We will have to wait and watch how US policy evolves after the elections rather than taking a pre-committed position as politicians can talk left and walk right," he said.

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Agreed Madan Sabnavis, chief economist at Bank of Baroda.

"There is a lot of ambivalence on the so-called Trump trade. On the one hand, he says he will strive to keep interest rates low and, by token, the dollar low to increase American exports. A weak dollar will raise demand for metals and other dollar-denominated assets, but in the same vein, he talks about raising tariffs of 20% on imports from other countries and even more from China. This will stoke inflation for Americans and result in bond yields rising there, which could lead to further FPI outflows from EMs."