Image Source: The Telegraph
So it is official now! Donald Trump will be the 45th President of the United States. His victory was not only unexpected but also feared. The impact was visible across markets. The Mexican Peso crashed sharply, US Dollar also lost value against hard currencies, the bond markets tanked and the Dow Futures took a hard knock. Paradoxically, the Indian markets appeared to be celebrating a Trump win. After touching a low of 8067 in early trades on November 09th, the Nifty bounced back to close above the 8400 levels. While these are early days, there are 7 key areas where Trump could have a bearing on the Indian economy.
Trump is not a big fan of the NAFTA
The North American Free Trade Agreement (NAFTA) was signed between Canada, US and Mexico to enable free and barrier-less trade between these countries. It has been Trump’s long held view that NAFTA was not in US interests. In fact, Trump not only wants to build a wall along the Mexico border but also wants to do away with the favourable terms of trade offered to them. This opens up a big window of opportunity for India. Like BREXIT opens the doors for India to negotiate separate trade agreements with the UK, Trump may enable India to negotiate separate trade agreements with the US and Canada. That could be an important takeaway for Indian companies looking at these markets.
Global equations could change, and India will stand to benefit
Based on the early statements of Trump, it looks like he may adopt a more conciliatory approach towards Russia. That will actually make the Ukraine stand-off pointless and reduce the overall geopolitical risk for India. There could also be a change in the stance of the US vis-à-vis Pakistan. It is unlikely that Trump would be too keen to continue to support countries for dubious geopolitical reasons. That will be a big boost for India. Also, Trump has shown a greater affinity towards India than towards China. He has already threatened to impose 45% duties on goods imported from China. Of course, with China holding over $1 trillion in US debt, it is doubtful how much Trump would be able to flex his muscles.
Trump could provide a big boost for the Indian healthcare industry
The big worry for Indian pharma companies was that if Hilary Clinton was elected then she had promised to come down heavily on both the formulations and the generic drug manufacturers. The carnage in pharma stocks that we saw last week was an outcome of a Department of Justice inquiry into pricing practices of generic drug makers. Trump has already indicated that he was unlikely to interfere too much in business matters and that will be good news for the Indian pharma industry.
Indian IT industry may have reasons to worry
One of the key promises of Donald Trump was to come down heavily on immigrants, especially on illegal immigrants. He has also promised to hike the minimum wage for immigrant workers, which could create problems for the entire IT business model which works on the cost arbitrage between the US and India. In tune with his measures to curb migrants coming steadily into the US, Trump has also promised to make visa rules more stringent and expensive. The IT industry, in a nutshell, may have some medium term worries as a result of a Trump victory.
Trump may give a big boost to spending and infrastructure
One of the underlying themes of Trump’s presidential campaign was to “Make America Great Again”. One of key focus areas was to invest substantially on infrastructure and boost the spending power. Trump proposed to cut corporate taxes from 35% to 15% and also cut personal taxes across the board. This will have a salutary wealth effect. US infrastructure has been crumbling compared to China and many other Asian economies. Trump will focus on investing heavily in US infrastructure. This will create a virtuous cycle of spending and investment and Indian companies will benefit via enhanced business opportunities and larger markets in the US.
Trump may favour a more dovish monetary policy
While Trump had criticised the Fed for being too slow on hiking Fed rates, his pro-business inclination is likely to adopt a more dovish monetary policy. For starters, Janet Yellen may not continue beyond 2018 and that may give Trump an opportunity to encourage a more dovish approach to monetary policy. While monetary policy in the US is largely independent, there is a political colour that it eventually takes up. In Trump’s case, the outcome will be a dovish policy. For India it means that global volatility risk will be reduced and the RBI will have greater leeway to cut repo rates.
Finally, what impact will Trump have on market sentiments?
The big advantage for Indian markets will be that the uncertainty is over and that will mean the VIX will also come down. As Mr. Dinesh Thakkar, CMD, Angel Broking put it succinctly, “With the victory of Donald Trump, the intermediate market uncertainty is over. This will enable markets to focus on the next big trigger of the Fed Policy in December”. For the Nifty, caught in the grip of uncertainty, the worst may have been discounted. The volatility may have allowed the market to find a temporary bottom. As Dinesh Thakkar summed it up, “One cannot really ignore the strong consumption story and the improving fundamentals of the Indian economy. Quite obviously, any dip must be used to accumulate quality stocks.”