The stock market was all cheers and confetti when Trump won—like a party that had a bit too much punch. But now, it seems like the euphoria wore off, and the market is nursing a hangover. So, does Trump’s victory actually mean good things for Indian stocks? That question falls right into Charlie Munger’s “too hard” bucket—a polite way of saying, “don’t bother, it’s a maze in there.” It is always safer to go with a stock-specific approach, focusing on companies’ actual growth potential rather than getting tangled in macro predictions that have more “ifs” and “buts” than a bad thriller.
Here’s the catch with event-based investing: it’s not so much the event itself that’s tricky to predict. The real mind-bender? Figuring out how markets will react to it. Remember earlier this year? Everyone was betting on the BJP to come back with an absolute majority. Analysts thought if they didn’t, we’d see markets nosedive. Spoiler alert: the BJP didn’t get that landslide, markets tanked for a day, then snapped back up, leaving everyone scratching their heads.
Coming back to Trump’s victory, it’s clear that trying to predict market reactions based on his campaign promises is as reliable as reading fortune cookies. Some of the anticipated effects are riddled with contradictions, and they’ll likely unfold in surprising ways over time. In other words, when it comes to policy actions and impact, a lot is still up in the air. Here is a glimpse.
1) Higher US earnings through corporate tax cuts
Point: Corporate tax cuts are expected to increase US corporate earnings, creating room for more business investment and potentially boosting sectors like IT services that rely on US corporate spending.
Counterpoint: These tax cuts, if unfunded, could lead to significantly higher fiscal deficits, which may weaken the US dollar over time. This could reduce the appeal of US assets compared to other markets, affecting global investments.
2) Increased tariffs to protect domestic industries
a. Point: Tariffs on imported goods aim to support domestic manufacturing and reduce the US trade deficit, potentially spurring job growth in US industries.
b. Counterpoint: Higher tariffs could drive up consumer prices, causing inflation, which may lead to increased interest rates and slower economic growth in the US.
3) Stronger US dollar from growth expectations
a. Point: Pro-growth policies like corporate tax reductions and tariffs could boost US economic growth, which in turn could strengthen the US dollar as investors flock to US assets.
b. Counterpoint: The stronger dollar might lead to a rise in US imports and a reduction in US exports, potentially balancing out any short-term gains.
4) Tariff-driven rebalancing of US trade deficits vs. risk of retaliation
a. Point: By implementing higher tariffs, the Trump administration aims to reduce the US trade deficit, encouraging local production and rebalancing trade.
b. Counterpoint: Other nations may retaliate with their own tariffs, sparking a trade war that could harm global GDP, including US growth, while increasing inflation in the US and across the globe.
5) Bond yields and short-term dollar strength vs. medium-term dollar weakness
a. Point: The monetary policy direction may be to push down rates considering seems to be coming closer to the target.
b. Counterpoint 1: The rates may stay higher not for monetary but fiscal reasons. The inflationary nature of protectionist policies and anticipated fiscal spending may lead to higher bond yields in the US, attracting investors and strengthening the dollar. For Emerging Markets, this means continued outflows.
c. Counterpoint 2: In the medium term, the pressure on the fiscal deficit could reverse the dollar’s strength as confidence wanes, especially if economic growth doesn’t keep pace with debt levels. Even so, a stronger rupee is not guaranteed.
6) Impact on emerging markets due to higher US market allocation
a. Point: The anticipated growth in US markets and high rates may lead asset allocators to favour US investments over EMs, especially given geopolitical tensions and trade uncertainties. This may cause Foreign Portfolio Investment (FPI) outflows from a;; Ems including India.
b. Counterpoint: Over the medium term, if the US dollar weakens due to fiscal deficits, EMs could regain favour with investors looking for growth outside the US. India, with its strong fundamentals, may particularly benefit if it remains competitive and resilient in the global market.
7) ‘America First’ policy on outsourcing and visas vs. need for global integration
a. Point: The America First stance is expected to limit outsourcing and impose tighter visa restrictions, which could protect US jobs and support domestic economic interests.
b. Counterpoint: Restricting visas and outsourcing could limit US companies' access to global talent, potentially stalling sectors like technology and creating operational challenges for industries that depend on skilled foreign labour, including the Indian IT sector.
8) Anti-ESG policies vs. impact on export potential
a. Point: The US may adopt policies less aligned with Environmental, Social, and Governance (ESG) standards, which may benefit traditional energy sectors domestically.
b. Counterpoint: India’s green exports, such as solar modules, could be affected if demand for environmentally friendly products from the US decreases, potentially slowing growth in India’s renewable energy sector.
Now, confused? That’s the point. Don’t make the mistake of looking for clarity when there is none.
So, the long and short of the Trump trade for Indian investors:
Point: US policy and impact is too hard to figure – take micro calls that are easier. Go long on stocks that show earnings visibility. This market is clearly unforgiving of companies slipping up on earnings and is attributing a premium to those that demonstrate strength and visibility. Trent, one of the top-performing stocks this year, is a prime example from today’s trade. A slump in sequential earnings and management caution on growth shaved seven percent off the stock. Thus, stick with those that show growth.
Counterpoint: There is a hefty premium on companies with visibility—they may simply be getting overpriced. So, choose carefully based on your timeframe. If you're focused on near-term performance, stay with those showing stronger earnings growth. If you’re willing to wait it out, buy the ones being punished for near-term performance, allowing you to buy them at better prices.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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