IGI Logo

Mr. Trump's victory again reconfirms rise of rightwing politics across the globe. In the geopolitical chessboard, the shift in policies by the Trump administration will lead to recalibration of national ties. It will be premature to comment with certainty how the interrelation between global politics, economics and financial market performance will evolve; however the market will pre-empt the impact based on available information on his policies and public comments.

Big boost for the global defense sector: NATO members, as well as allies like Korea and Japan, will be forced to spend aggressively on defense. Mr. Trump has commented in the past that he would encourage Russia to do “whatever the hell they want” to any NATO member country that doesn’t meet spending guidelines on defense. A global arms race has already begun, but with Mr. Trump in power, it may fan expansion of defense budgets across the globe. India’s defense sector still in a nascent stage. With overall defense spending set to accelerate, Indian defense companies, as well as certain mid-cap IT companies in ER&D and aerospace, may benefit.

Tax cuts for US corporates: This may adversely impact other developed countries such as Canada and European countries more than Indian corporates. The US is India’s largest export partner, and largely, our companies are part of the larger supply chain for US companies. Watch out for the Canadian dollar, Euro and the Yen. Significant currency depreciation could hurt these economies as it may lead to inflationary pressures.

Implications for India: Under the Trump administration in the past the QUAD flourished and under Democratic leadership the relations became lukewarm. Mr. Trump probably may visit India as soon as in 2025 and there could be several implications for bilateral ties with both countires especially on Defence, EVs (Tesla's entry), Tech transfer, etc. India might be forced to cut tariffs on US imports, but at the same time, with higher tariffs on Chinese imports, may provide good access to US market. Companies in cables and wires, electronics supply chain companies, pharma, and chemicals can benefit the most.

Mr. Trump has also vowed to stop the Russia-Ukraine war. Today, the US has over 20,000 sanctions on Russia, and it remains to be seen how the Trump administration tries to broker a peace deal, as this may improve oil market supply dynamics.

Negative for INR and Yields in the near term.

The market has already factored in a stronger dollar and higher US yields as Mr. Trump’s policies seems to be inflationary. Hence, in the near term, the INR may depreciate, and Indian yields may see some spike. However, in the long run, we believe higher inflation and a burgeoning US fiscal deficit may eventually hurt the dollar.

Nevertheless, the currency market is a zero-sum game, and the USD may not depreciate if the macroeconomic problems in Europe, China, and Japan worsen faster than in the USA. It is complicated, but certainly, it seems that the RBI is well-prepared to deal with such heightened volatility in the currency market.

Market Outlook: We have been recommending investors to stay invested and rotate their portfolio towards defensive and large-cap stocks. The FPI sell-off may hit selling fatigue, and as the government starts to step up their spending efforts (already some signs are visible), the economic momentum may pick up in the coming months. Hence, we maintain a neutral stance on equities and advise staying invested as per the asset allocation plan.

The RBI may postpone their rate cut decisions due to the spike in food inflation, pressure on the INR, and global uncertainty. However, the liquidity situation is slowly easing, and deposit growth in the banking sector has picked up pace. We believe this correction in the bond market is a good buying opportunity to add duration.

Our positive view on gold continues, albeit in the near term, gold prices may come under pressure due to a stronger USD and higher yields. Our positive stance on US equities and negative stance on Chinese equities continues. China has limited headroom to stimulate, as the economy is struggling with debt, deflation, and demographics, in our view.