With Donald Trump poised to make a comeback to the White House, two specific areas of policy making require careful observation—trade policy and fiscal policy, according to a report from brokerage firm Nuvama Institutional Equities.
Following Donald Trump's victory over Kamala Harris in the tightly contested 2024 US Presidential Election, Nuvama also said that it is premature to evaluate the consequences of Trump's second term.
The brokerage predicts that regarding trade, Trump might opt for a multilateral approach in the tariff war, which has primarily concentrated on China until now. This shift could be due to the lack of progress in US manufacturing and the trade deficit despite several tariff increases on China since 2018.
As a result, Trump could adopt a more aggressive stance on trade by expanding his targets beyond China.
On the domestic front, he may consider tax reductions or even an increase in spending to bolster the economy, which could lead to a larger fiscal deficit, similar to what occurred during his first term. This will present its own set of challenges, as the US sovereign debt is significantly greater now than it was in 2018.
“If these actions come through, India’s exports could slow further and any hardening in USD/bond yields could delay the RBI’s rate cuts. This could potentially increase volatility in equity markets as the earnings momentum is slowing and valuations are quite elevated. Maintain defensive bias with private banks being the key cyclical OW,” the brokerage said.
Nuvama indicated that if Trump removes tariffs universally, other nations might respond with countervailing duties, potentially leading to a global trade conflict that could severely impact both the global economy and India's economy. For starters, this could affect global trade (which is already struggling), subsequently harming India's exports, along with the possibility of India facing tariffs as well. Additionally, it could increase the risk of inflation. Ultimately, if Trump opts for aggressive trade and fiscal measures, it could create a macroeconomic strain on the global economy—resulting in higher prices and reduced growth.
“Markets were quite buoyant in the first year of Mr Trump’s tenure (in 2017), but it was backed by upbeat global growth, earnings (post-DeMon slump) and reasonable valuations. But tax cuts in 2018 reversed the rally with mid caps correcting 20–30%. IT was the best performing sector in 2018, benefitting from increased spending by US corporates and INR depreciation. Today valuations are quite elevated, and the earnings momentum is weakening,” noted the brokerage in its report.
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