Trump, black money sink Nifty, Sensex: Here's what you should do

An increasingly-likely Donald Trump victory in the US presidential polls caused a meltdown in global stock and currency markets early Wednesday, with Indian shares also reeling under a major government crackdown on the cash economy.

The Sensex slumped about 1,600 points at open, though it recouped some losses later, as equities tried to digest the full impact of both events.

A Trump entry into the White House, written off as unlikely by most pollsters in the run-up to the event, has analysts worried most. The candidate, who had billed himself as a Washington outsider, has promised to tighten immigration and reverse free-trade policies, potentially threatening to upend a decades-long trend of increasing globalization.

Stating that a Trump victory could be a bigger threat to markets than even the Brexit vote, which had also caught equities on the wrong foot, noted investor Adrian Mowat said he saw the period between now and January (when the President assumes office) as a bad one.

“This has much broader implications [than Brexit],” Mowat said. “Brexit was a buying opportunity in emerging markets. I am not sure if that is the case here with a Trump victory.”

“A trade war, which would come about if Trump pursued the policies he talked about with regards to Mexico and China would be a negative for global growth,” Mowat said.

Additionally, Trump has pledged to reduce taxes while also maintaining spending, which could potentially burden the exchequer and cause a spike in bond yields.

“So we would expect bond yields to go up. That volatility would impact the flow that we are seeing into emerging market fixed income,” he said.

Local equities were also hammered by a landmark decision by the Narendra Modi government to demonetize Rs 500 and Rs 1000 currency notes, in a bid to fight the menace of black money and counterfeit currency.

While analysts have hailed this as a huge long-term positive, it could create temporary disruptions in the economy – such as causing a cash squeeze and even hitting private consumption, part of which thrived on the cash economy.

“Over a longer period of time, we may look back two years down the line and feel that this was a decisive reform that took place in India,” said CNBC-TV18 Consulting Editor Udayan Mukherjee, who has over the past few years given up full-time journalism and taken up an abode in the Himalayan state of Uttarakhand.

“Out here, people will be absolutely frozen. They just don’t know what to do. Small and medium enterprises, individuals -- and I think a large part of the Indian economy is made up with such people and such enterprises. I think they are probably running from pillar to post trying to figure out what hit them overnight. This will have tremendous consequences in the near term for the economy, for companies and their ability to service payments and what it needs in terms of the banking system as well,” he said.

But while traders will do well to be cautious of the screen, and right now, the trend is clearly down, classical value investors say investors should be ready to catch bargains.

“I do not want to make you doubt that this bull market will climb this wall of worry,” said veteran investor Ramesh Damani.

“Great businesses will find a way to prosper and while we will have an economic hit -- no question this quarter will be pretty bad for most companies that we follow -- in the long-term, unless the government tackles black market and corruption, we are just not going to get ahead as a nation.”