Mar 20, 2017 08:41 PM IST | Source: Moneycontrol.com

COMMENT: Trump's speech promises what markets like: Predictability

Immigration, healthcare, tax cuts and revamping the military were the four key areas covered. There may have been a nationalist undertone, but there were no details furnished that should rattle financial markets.

COMMENT: Trump's speech promises what markets like: Predictability
Madhuchanda Dey

Moneycontrol Research

The rhetoric of the US election campaign -- “America First” and “Making America Great” -- was intact but the fine print of Trump’s address to Congress suggests that his aggression is on the wane. There is a departure, admittedly subtle, from the rabble-rousing and campaign-like Inauguration Address that he delivered on January 20.

Immigration, healthcare, tax cuts and revamping the military were the four key areas covered. There may have been a nationalist undertone, but there were no details furnished that should rattle financial markets.

So how should Indian markets read Trump’s address?

With some relief. It is ‘mildly positive’ and here’s why:

President Trump, while pledging his commitment to bring back millions of jobs to America, touched upon “reforming the system of legal immigration”. He called for adopting a "merit-based system" for immigration, saying "it will save countless dollars, raise workers' wages and help struggling families." He touched upon the need to switch away from lower-skilled immigration and adopt a merit-based system, adding that Republicans and Democrats could work together to achieve immigration reform.

This allays a key concern among IT companies that this isn’t a blanket ban on foreign workers. Exporting low-skilled workers wasn’t an option for Indian IT companies any more due to the changing technology landscape. If Indian companies continue to add ‘value’ to their clients, the business model will survive the much feared “Trump Effect”.

The other area that was highlighted was healthcare. While dumping his predecessor’s signature reform ‘Obamacare’, he stressed upon expanding choice, increasing access and lowering costs. There was no mention of the much-feared local sourcing of drugs that had kept many of our pharma companies on tenterhooks.

Trump’s reference to the “slow and burdensome approval process at the Food and Drug Administration” (USFDA) represents the shape of things to come – probably faster approval for the right kind of molecules. Here again, Indian pharmaceutical companies with strong product pipelines should weather the storm easily.

On the taxation front, he vowed "historic" reform to reduce the corporate tax rate to make US companies more globally competitive and promised "massive" tax relief for the middle class. But the speech fell short on details. Indian companies should take heart from his silence on the controversial border adjustment tax.

Finally, on the geopolitical front, he once again vowed to destroy the Islamic state, rebuild America’s military and hinted at a substantial increase in military budget. This, alongside his reiteration of a USD 1 trillion investment in infrastructure, financed through both public and private channels, had the predictable impact on the US dollar – the Dollar Index jumped 0.44 percent this morning.

The fiscal expansion in the US might add a further leg to the commodity rally. Emerging markets like India need to be watchful about the impact of the strength of dollar on flows, Current Account, Currency and finally on domestic rates.

Trump’s passing reference to China (no overt trade war) and no mention of Mexico paying for the wall in the South perhaps foreshadows the emergence of a new, more predictable avatar. Markets, ever wary of uncertainty, would like that.
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