Trumponomics 2.0: Decoding the Impact on the Indian Equity Market

Assassination attempts, criminal convictions, and a shifting political landscape couldn’t halt Republican Donald Trump’s stunning return to power in the 2024 US Presidential election. It is a political comeback like no other, fuelled by a sweeping mandate from the American electorate.

As President-elect Trump prepares to reclaim the world’s most powerful office in January, the global markets are already buzzing with speculation about what lies ahead under Trumponomics 2.0.

Post the election result, global market was on euphoria as Trump is consider to be capitalist. Indian equity market too surged. The BSE Sensex closed at 80,378.13, up 901.50 points (1.13 per cent), and the Nifty rose to 24,484.05, up 270.75 points (1.12 per cent), following the election results.

The initial euphoria, however, in financial markets, following Trump’s victory has given way to cautious optimism, with domestic equity markets witnessing some turbulence and the following day it reversed all the gains.

The question now is: what will Trump’s radical economic policies mean for India’s growth story and your investment strategy?

 The next four years under Trump are poised to reshape US-India trade relations, global supply chains, and economic policy dynamics. Economic outlook presented by Donald Trump could, if put into practice, trigger higher inflation in US — provoking action by the Federal Reserve that would impact economies across the world, including India. Here’s what to look for in the spheres of business and economy.

The radical economic outlook presented by Donald Trump includes plans to impose a 20 per cent tariff on all imports and more than 200 per cent duty on cars; a proposal to deport millions of irregular immigrants; and to extend tax cuts at a time when the US budget deficit is at record high. Part of this already reflected in his recent tweets.

In a post to Truth Social, Trump said he plans to impose broad new tariffs on Mexico, Canada, and China on his first day in office, calling them part of a crackdown on immigration and illegal drugs. He said Mexico and Canada would be subject to 25 per cent levies on all products, while China would be subject to an additional 10 per cent “above any additional tariffs.” Various companies have been warning that such measures could eat into profits and the costs would be passed on to consumers.

His renewed emphasis on “America First” policies, could send ripples through India’s trade-dependent sectors and create headwinds for foreign capital inflows. Moreover, a potential shift in Federal Reserve policies to counter inflation in the US could significantly influence the Reserve Bank of India’s stance, complicating India’s monetary policy decisions.

A Republican victory under Donald Trump could significantly impact the auto sector, with a likely emphasis on local manufacturing and increased infrastructure spending, potentially revitalizing the Class 8 truck segment and benefiting Indian suppliers like Bharat Forge and RK Forgings. Trump’s tough stance on EVs might lead to reduced incentives and subsidies for EV manufacturing in the US, potentially slowing EV sales and affecting Indian auto component players like Sona BLW, whose order book is 80% EV-focused. This slowdown could prompt US ICE manufacturers to scale back EV plans, disrupting production schedules for their suppliers, including Indian companies. However, a rise in hybrid vehicles could offset the impact, as hybrid production would increase revenue opportunities for Indian players like Sona BLW by allowing them to supply components for two powertrains per vehicle. Furthermore, Trump’s focus on reducing cheaper auto imports could result in higher tariffs on components from China and Mexico, with national security concerns also driving a tougher stance on Chinese-made vehicles. This could open opportunities for Indian manufacturers as the supply chain gradually shifts from China and Mexico to India, benefiting export-oriented Indian auto component players.

Past US Election Cycles

Looking back at past US election cycles, the Nifty50 performance generally shows a positive trajectory in the 1-month, 3-month, and 6-month periods after election day. While these historical trends are informative, they should be taken with a grain of salt as various factors contribute to market performance. The influence of an election is one among many.

The adjacent graph highlights the performance of the Nifty 50 index in the months following U.S. presidential elections over different years, providing insight into its reaction to global political events.

Historically, the index’s performance has been mixed in the 1-month, 3-month, and 6-month periods post-election. For instance, in 2008, the Nifty saw a sharp 11.3 per cent decline in the first month but rebounded strongly with a 22.3 per cent gain over six months, reflecting recovery post the global financial crisis.

Conversely, in 2020, the index recorded robust gains of 11.2 per cent in the first month, accelerating to 25.5 per cent in three months and 21.7 per cent over six months, likely driven by market optimism about pandemic recovery measures. On average, the Nifty has returned 2.1 per cent in 1 month, 7.8 per cent in 3 months, and 12.8 per cent in 6 months following U.S. elections, underscoring that market responses can vary widely depending on prevailing economic and geopolitical contexts.

Currently fundamentally, the Indian stock market remains on fragile ground, with Q2 earnings disappointments and valuations that are yet to dip into the attractive zone despite a recent 9 per cent pullback from late September’s record highs. Nifty 50’s forward P/E still trading at around 16 per cent above its 10-year average.

In this article we’ll delve into how Trumponomics could redefine India’s economic trajectory, affect fund flows, and alter the investment landscape. Will it open up new opportunities for investors, or will it exacerbate challenges in an already volatile global economy?

Let’s explore the critical areas that could determine the future of Indian equities. To understand the impact, we will first see the major policy change and then assess its implication in different sector.

Volatility & Stronger US Dollar

The new administration is widely expected to follow a similar trajectory as its previous tenure, deviating from traditional governance and policy-making norms to chart an unconventional course. Analysts suggest that this approach could lead to a significant divergence in economic indicators like inflation and interest rates in the US from global trends. This deviation is likely to amplify uncertainties in global financial markets. Experts emphasize that the political shift will ensure elevated macroeconomic volatility in the foreseeable future, impacting investor sentiment and market stability worldwide.

Donald Trump’s re-election as U.S. President could have significant implications for Indian pharmaceutical companies, offering both opportunities and challenges. Higher U.S. tariffs on imports from China, Mexico, and Canada may make Indian pharmaceutical products more competitive in the American market, boosting exports. Additionally, the U.S. Biosecure Act of 2024, aimed at reducing reliance on Chinese supply chains in biotechnology, could create opportunities for Indian firms to fill supply gaps. India’s established strength in the generic drug market further positions it to benefit from these shifts. However, the potential appointment of Robert F. Kennedy Jr., known for his anti-vaccination stance, as head of the Department of Health and Human Services, raises concerns about changes in vaccine regulation, potentially affecting Indian vaccine exports. While the focus on reducing dependency on China may favor India, the possibility of tariffs on imports from other countries, including India, could pose challenges. Despite these hurdles, Indian pharmaceutical companies can leverage policy shifts and supply chain realignments to strengthen their presence in the U.S. market. Impact on Companies: Sun Pharmaceuticals, Aurobindo, Dr. Reddy’s Laboratories, Wockhardt

Inflation Impact, Fed Stance and Chinese Tariffs

The central focus of the new administration is expected to revolve around an inward-looking economic agenda prioritizing domestic interests. Policies aimed at addressing trade imbalances through increased tariffs and boosting local manufacturing are likely to take centre stage. This protectionist stance could reshape global trade dynamics, creating opportunities for the US but posing challenges for other economies.

While this approach appears favourable for the US equity markets in the short term, it raises concerns about the broader global economic landscape. Slower global growth, coupled with elevated geopolitical tensions and restrictive trade measures, may make emerging markets less attractive to global investors, potentially impacting asset allocation strategies and economic stability worldwide.

Higher tariffs and a trade war would most certainly lead to higher inflation in the US. This, combined with runaway deficits and a possible dilution of institutional autonomy could lead to foreigners beginning to rethink if they should lend unlimited money to the US Treasury — which has been a given thus far. For this they may demand higher interest rate, which is reflected in the higher government bond yields. The US 10-year treasury yield is already up by almost 50 basis points since October start, which partly reflects the same.

Market’s Uncanny Ability

Markets have an uncanny ability to anticipate information and price it in efficiently – collective intelligence often outperforms individual judgment. Since mid-September, U.S. bond yields have surged by nearly 90 basis points to around 4.45 per cent (compared to a post-pandemic peak of 5 per cent and a recent high of 4.65 per cent), a significant move that will take time to fully digest. Unsurprisingly, the U.S. Dollar Index (DXY) has also risen by about 6 per cent to 107 during this period.

As we now know, the U.S. has decisively voted for Trump. These market shifts reflect his policies, even though he would prefer lower yields and a weaker dollar. The primary rationale for higher bond yields and a stronger dollar lies in expectations of tariff-driven inflation, including potential 20 per cent tariffs on allied nations and 60 per cent tariffs on Chinese goods. This scenario implies a slower pace of rate cuts or a higher neutral rate, reinforcing dollar strength.

The magnitude of the bond yield and dollar surge indicates increased expectations for tariff-based policies. It’s crucial to carefully consider the secondary and tertiary effects before drawing definitive conclusions.

Oil & Gas: Donald Trump’s policies, including trade tariffs and increased U.S. oil production, are expected to put downward pressure on global crude oil prices through 2025, benefiting energy-importing nations like India. V. Anantha Nageswaran, India’s Chief Economic Adviser, highlights that lower energy prices are crucial for India’s economic growth, given that the country imports over 80% of its crude oil requirements. Reduced import costs can ease fiscal pressures and bolster economic expansion. Trump’s pro-energy stance emphasizes increased fossil fuel investments, with policies aimed at expanding drilling on public lands, reopening offshore oil and gas exploration, resuming LNG export permits, and reducing federal support for EVs while potentially easing emissions regulations. Higher U.S. oil and natural gas production could enhance global availability, offering India more opportunities to diversify its energy imports and secure better terms. These factors point toward an environment of higher production and lower energy prices, creating strategic investment opportunities in oil marketing companies (OMCs) and airline stocks.

A Possible Watershed Moment

Such a shift could mark a possible watershed moment – of the scale, perhaps, of the decision in early 2022 to freeze Russian foreign assets, which forced central banks around the world, including RBI, to buy physical gold rather than derivatives or exchange-traded funds that track the yellow metal’s price.

The high tariffs on Chinese goods promised by Trump could shave more than 2 percentage points off China’s growth during the next year, according to analysts.

Beijing could, therefore, push a bigger stimulus package. Brokerage firm, Nomura anticipates the eventual scale of China’s fiscal stimulus package to reach 2-3 per cent of GDP annually over the next several years. This could make other markets, including India, less appealing to FPIs and other key investors.

IT Sector

At first glance, the impact of Trump’s anti-immigration stance on Indian IT companies might seem harsh. However, Indian IT firms have taken steps to reduce this risk. They have been hiring more local workers in the US, Mexico, and Canada, relying on subcontractors, and opening more near-shore delivery centres. This approach helps them depend less on US visas. As a result, local employees are increasingly becoming a permanent part of these companies’ workforce.

Apart from delivering services from onsite and offshore centres, companies have invested in near-shore centres located in countries such as Mexico and Canada. These centres have lower costs compared to onsite locations, but they are in similar time zones, so clients are more comfortable giving more work to IT companies.

Number of Employees in the US, Mexico, and Canada

This shift in perspective comes after IT services players underwent consecutive difficult quarters of clients holding back spending, particularly on discretionary projects, due to macroeconomic concerns and inflationary pressures. Stricter U.S. policies on outsourcing and restrictions on H-1B work visas could weigh on India’s IT sector, which relies heavily on the U.S. market.

Trump’s presidency could be powerful and “bodes well for the business and how customers will spend. The government is very pro-business and pro-growth, which helps all of our customers, which ultimately helps partners here in India and world over, pointing to the potential corporate tax rate cuts and easier business regulations,” says a company promoter.

Indians receive the highest number of work visas from the United States, mainly for the IT sector.  The sector also relies on U.S.-based clients for a significant portion of its revenue. The overall impact of Trump’s second presidency should be “positive” on India’s IT sector. This will be especially good for all major Indian IT companies including TCS, Infosys and Wipro.  Starting with the positives, extension and deepening of U.S. corporate tax rates could support a bounce-back in enterprise technology spending.