Beyond the Budget: What the US election means for Indian markets

Now that the Union Budget is behind us, the next significant event to watch is the US presidential election—a critical factor for equity investors given the Western country’s global economic and political influence.

The outcome of the election, barely 100 days away, would have a bearing on currency fluctuations and the US-India relationship under a new American government, and could significantly impact domestic companies and sectors with foreign exposure. 

For instance, restrictive visa policies could hurt India’s software services sector, while a reduction in US corporate taxes could boost export opportunities. Additionally, increased healthcare spending may benefit Indian pharmaceutical companies.

Historical trends show that US election results tend to have an impact on Indian equities, said R. Janakiraman, chief investment officer-emerging markets equity-India, Franklin Templeton. The US election outcome will be evaluated on the basis of impact on new trade policies, tariffs, trade agreements, geopolitical stability, and currency movements, he said.

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The race between the two US presidential candidates, Donald Trump and Kamala Harris, is intensely close. According to one US poll, Republican nominee and former US president Trump has 48% approval rating among Americans, and vice president Harris, 47%. In another recent poll, by Reuters/Ipsos, 44% favoured Harris and 42% rooted for Trump. 

“My assessment is that if Trump were to win, it would be positively taken by the US markets as he would be considered better for earnings growth and corporate profitability,” said Prashant Khemka, founder, WhiteOak Capital Management. 

If the US equity market performs well, it will exert an uplifting force globally for other markets, including India. Additionally, a tougher US stance on China could benefit India, said Khemka. 

When the US adopted an anti-China stance during Trump’s prior term, Indian boardrooms began to explore potential opportunities, embracing the China-plus-one strategy that encourages businesses to expand manufacturing beyond the Asian giant, he added.

The new US government’s geopolitical and international relations priorities may have a bearing on foreign institutional investments into emerging markets, including India, said Sandip Bansal, senior portfolio manager, ASK Investment Managers.

Even if the US government raises import tariffs India could still benefit as it is likely to have relatively lower rates imposed on its exports versus countries like China, he said, adding that India is the best long-term story among large emerging markets.

The Trump factor

That said, businessman-turned-politician Trump’s propensity for US-centric policies such as trade protectionism, stricter visa regulations, and reduced foreign investment could affect Indian stocks, said Jiten Doshi, co-founder and chief investment officer, Enam AMC. 

But he also said that Trump’s policies often aim to foster friendly business alliances and that his previous term had notable efforts to diffuse tensions in regions such as Middle East-Israel, North-South Korea, and Russia-NATO.

During Trump’s previous presidential term, from around January 2017 to December 2021, the Nifty 50 registered an impressive return of 112%, and the Sensex, 119%. That period straddled the first two terms of Narendra Modi as India’s prime minister, which he followed up earlier this year with a historic third term in government.

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Irrespective of the election outcome, the US is unlikely to change its policy on diversifying manufacturing from China, which should help India attract not just capital but also a larger share of global trade, said Jay Kothari, global head-international business, DSP Asset Managers.

“Interestingly, within Asia, India has a lower beta (impact) to global news flow, or say recession, due to its relatively lower proportion of exports to GDP. This also means that India is still more inward-looking. Malaysia, Hong Kong, Singapore and Taiwan, on the other hand, have a higher beta as exports as a percentage of GDP is much higher for these countries,” Kothari explained.

Other important factors to watch include US policies on tariffs, global trade, immigration, outsourcing regulations, energy prices, and currency.

A weaker dollar

As the US presidential campaigns gain momentum, Trump’s preference for a weak US dollar has captured widespread attention.

A weaker dollar would be beneficial for emerging markets like India, boosting market sentiment, enhancing global trade, and helping to improve corporate earnings. 

During Trump’s previous term as president, the dollar index had weakened in the initial few quarters before stabilising, pointed out Ajay Tyagi, head of equities at UTI Asset Management. Given that Trump wants a weaker dollar to boost the country’s export competitiveness, a similar currency movement may happen again if he wins, he added.

This, however, is unlikely to have a significant impact on foreign investments into Indian markets as foreign institutional investors (FIIs) and foreign direct investment (FDI) flows are primarily driven by India’s stable growth potential as compared with other emerging markets, Tyagi said.

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During Trump’s previous tenure, however, the rupee depreciated from 68.1775 to 73.02, pointed out Anuj Gupta, head of commodity and currency at HDFC Securities Ltd. The currency has since depreciated much further. On 29 July, the rupee was 83.72 to $1.

But with the Republican candidate expressing a preference for a weaker US dollar, expectations are that the rupee may strengthen. It would have a bearing on the markets too, as a weaker dollar can make US assets less valuable and foreign investments more attractive. 

As global investors seek higher returns in emerging markets like India, the increased demand for Indian assets would boost the rupee's value. Additionally, with the market anticipating a potential rate cut by the US Federal Reserve in September, the rupee could appreciate further in the coming months. 

A Fed rate cut would mean lower interest rates in the US and, thus, lower returns on US assets, leading investors to seek better yields in markets like India. This increased demand for Indian assets would raise the rupee’s value.

“If the Fed cut rates in September, the initial reaction to the rupee could be positive as the US dollar and treasury decline,” Gupta explained.

The US interest rate is not the only factor affecting the rupee, he said, adding that other Asian currencies, domestic macro factors, dollar flows, and any intervention by the Reserve Bank of India could also impact the currency's movement.

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