The financial markets are watching the US Presidential Election with bated breath. The street is however divided on who could ring in higher gains. While Trump seems to promise active rate action, Harris offers stability- all eyes on the market verdict.
The election for the next US President is underway. While there is no clear correlation between the US Presidential election and the Indian markets, the policies of the new government do impact the extent of the return and how the stocks pan out. As a result, you will see that there is a sense of apprehension in the market.
In many ways, the results of the US election are also set to determine the direction of flows to the emerging markets including India, the dollar’s strength and the rate action from Central Banks globally. As a result the overall impact on the economy is expected to also steer the Nifty and Sensex.
Can Trump mean good news for India?
The outcome of the US Presidential elections seems too close to call as of now. Dhiraj Relli, MD & CEO of HDFC Securities pointed out that “from a medium-term perspective, Trump may be good for India and Indian markets due to the domestic demand-driven growth model and benefits from lower commodity prices, supply chain shifts, and foreign policy. Lower commodity prices owing to the hit to China’s growth and lower oil prices, due to a greater push towards fossil fuels, could be a macro tailwind for India.”
He added that a “win by Harris could be largely neutral for the global economy, equity markets, energy prices, gold prices and base metal prices. A Harris win will also mean it is easier for highly skilled immigrants to work in the US, which will be a positive for the Indian IT sector. A Trump win could cloud the prospects for the Indian IT sector for some time. Trump’s noise on the reported India’s high tariffs will come to test if he comes to power.
He however pointed out that, over the past eight decades the S&P 500’s SPX annualized total return (inflation-adjusted) has been 11.0% in years when a Democrat is President and Congress is Republican-controlled.
Gains or losses could be sector-specific
The 2024 US Presidential election between Kamala Harris and Donald Trump is too close to call, with the seven swing states set to decide the final outcome. The latest report by JM Financial highlighted that “Trump’s proposed policies of lower corporate taxes, higher tariffs on China/ rest of the world and incentives for local manufacturing are expansionary in nature and could lead to higher interest rates, a stronger US dollar and a slowdown in global growth. He also intends to withdraw from the Ukraine-Russia war. Harris’ proposed policies are more about maintaining the status quo, though she does intend to implement higher taxes on corporations and wealthy Americans. She intends to protect the interests of the middle-class/low-income groups. Support for the Ukraine-Russia war and NATO should continue.”
While there is no clear correlation between the party in power and the performance of indices during the party’s tenure, the report stated that “Market returns are dependent more on the state of the economy and the policies of the party in power. The Democrats staying in power implies sharper rate cuts, which will be good for life insurers. Expect RBI to cut interest rates given the recent slowdown in India. This would be positive for NBFCs (NBFCs had rallied earlier in Jul’24 to Sep’24 in anticipation of a rate cut by the Fed). A Republican outcome could lead to a tighter interest rate regime in the US (and thus a stronger USD), which could keep RBI on the back foot w.r.t to interest rate cuts. This could be negative at the margin for Insurance companies.”
Apart from the BFSI sector, auto ancillaries, commodities, the oil & gas sector and real estate are the other key sectors to watch out for, in terms of what could be the ripple effect of the individual policy moves by the Governments in power.
Markets to see, short-term impact – party time for the bonds
Dr V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services added that “The impact of the US Presidential Election result will be only short-term. In the past, most election results had a positive short-term effect on the market. During the last three presidential elections, the stock market responded positively to the victories of Obama, Trump and Biden. It is important to note that stock markets have responded positively to both Republican and Democratic victories.”
Shrisha Acharya, Vice-president, Anand Rathi Global Finance explained that the “US Presidential Elections have always been the apple of the financial world’s eye, even now, it has caught the spotlight while creating all the buzz in financial markets, with potential outcome shaping divergent paths for both bonds and equities. For instance, the Trump card, coupled with potential Republican control, could shoot higher yields due to anticipated increases in deficit spending, inflation risks, and potential tax cuts. This could very well jiggle the confidence in the U.S. Treasuries and thus, start a chain effect that will possibly impact global market stability and lead to short-term volatility.
On the other hand, Harris’ rise has been met with a stock market rally glued on expectations of economic stability and controlled inflation, with more predictable fiscal policy likely to help in a soft landing. In any case, a contested election, which remains probable, could extend market uncertainty, magnifying volatility across the equity and bond market until the winner stands tall.”
He however added that “for the domestic G-sec market, the Trump card possibility could lead to the rise of the US 10-year yields which would, most likely, have a butterfly effect resulting in the rise of the Indian 10-year benchmark yield to above 6.90%. On the other side, Harris’ victory would not hinder the market sentiment a lot and Indian 10-year benchmark yield will remain in the range of 6.65- 6.90%.”
Nevertheless, the market will keep a close eye on the Fed policy decision due on Thursday, and the overall fiscal stance as that would be a key factor controlling the longer-term inflation, growth trajectories and the potential for rate adjustments to stabilize inflation and boost growth.