Trump’s victory ignited a market rally, but will the party last?

Indian markets are following suit with a strong recovery on Wednesday. Meanwhile, Trump's victory has unnerved the Chinese equity markets. The Hang Seng Index is one of the major equity markets that have slipped sharply and ended on a negative note today. The levy of high tariffs to curtail imports from China has been one of the key policy planks for Trump along with the focus on revamping of the immigration policy.

The negative news for China is also good news for Indian equity markets. Lately, domestic markets have suffered from the shift of foreign flows from India to China as part of the tactical trade, post the huge stimulus announced by the Chinese government to support their economy.

The pro-business approach of President Trump along with the imposition of tariffs to safeguard interest of local businesses and jobs could be positive for the equity markets in the US. 

But the celebrations might not last long. First, historical data shows that the US markets do not tend to do well for the first 90 days post the presidential elections. Second, Trump's policies could be inflationary in nature. It could result in the hardening of bond yields (which already crossed the 4.4% mark today) and might strengthen the US dollar (the doller index has surged past the 105 mark). 

This essentially means that the rate cuts by US Federal Reserve could be delayed or curtailed due to inflationary pressure. Also, the strengthening of the US dollar is negative for foreign inflows into emerging markets, including India.

Also Read: Mint Explainer: What Trump’s victory means for US, India and rest of the world

Specific to India, the quarterly result season has not been encouraging at all. The slowdown in Q1 persists in Q2 as well, leading to a cut in earnings estimates for Nifty companies by 2-4% for FY25/FY26. The Nifty earnings growth estimates for FY25 have been tempered down to low single-digit compared to expectations of a double-digit earnings growth expectations at the start of the fiscal year.

Policy uncertainties, possible delay in rate cut cycle and slowing earnings growth may also act as a hurdle. 

Tread with caution

Investors will do well not to get carried away by the celebrations in the equity markets. Better approach would be to carefully select certain stocks and buy gradually over the next four-eight weeks.

In terms of sector view, the biggest disappointment in the Q2 earnings season has been the bigger-than-expected slowdown in consumer demand. Rural demand was muted and urban demand also tapered off lately.  Then there are asset quality issues in unsecured advances of non-banking financial companies (NBFCs) and some private sector banks. Hence, FMCG, autos and NBFCs have been the worst performing sectors and could continue to weigh on the markets.

Read more | A second Trump term is not good news—either for the US or the world

Meanwhile, the demand outlook for IT services, pharma (especially CDMO players), and real estate companies is quite positive. Valuations in public sector banks are also looking attractive after the sharp correction in the past few months. So focus on stocks where there is valuation comfort and the risk of earnings downgrade is limited.

Finally, the phase of easy money is over. It is going to be stock pickers market and investors will have to do some homework to identify money making ideas. Over the medium term, we remain very positive on the multi-year economic upcycle in India and the consequent opportunity in the equity market.

Gaurav Dua, head, capital market strategy, Sharekhan. Views are personal

Also Read: Brace for impact: How Trump's tariff plans could affect Indian businesses