Donald Trump’s decisive win in the Nov 2024 U.S. Presidential election indicates that the U.S. wants to look inward and fix itself rather than meddle in the world.
Trump’s trifecta win of the U.S. presidency, the Senate, and the House of Representatives gives him absolute control to govern as he thinks fit. America has indeed turned a corner on its moral high ground by voting for a convicted felon. The opposition (Democrats) will play the blame game as they ultimately lost the plot. Be that as it may, America and the world must live with Trump’s policies. In time, we will know whether they will be as aggressive as his election rhetoric. One hopes that better sense will prevail and that we will have a calm Trump ruling the world.
The aftermath of Trump’s win..
Tariff war: China is Trump’s sworn enemy, and he imposed tariffs on several Chinese goods in his first term. This time, he has promised a 60% tariff on all imports from China and 20% from anywhere else. China is the cheapest producer in the world, and a tariff war will result in conflict and increased prices. In 2023, China was the fourth-largest U.S. goods trading partner (with total trade at $575 billion), the fourth-largest U.S. export market ($147.8 billion), and the second-largest source of U.S. imports ($427.2 billion). If a tariff war ensues, other countries may impose retaliatory tariffs, increasing revenue for the tariff-imposing countries, including the U.S., along with inflation.
While Indian exports may become more competitive, we are no match in cost or capacity to replace Chinese goods. China may flood India with its cheap goods, and India, being so dependent on it for so many inputs, may be unable to stall them.
Immigration: Trump has vowed to banish illegal immigrants from the U.S., which he had also promised in his first stint but did not do much. It is assumed that the number of unlawful immigrants is anywhere between 10 to 25 million in the U.S., and Trump plans to start deporting one million at a time.
If Trump decides to execute this promise, there will be massive paperwork; whether USICS (U.S. Immigration and Customs Enforcement) is equipped to deal with this kind of mammoth exercise is a question. Apart from the humanitarian fallout, deporting low-cost illegal workers will result in labor shortages, higher costs, and inflation. The U.S. Fed has just begun cutting rates as inflation is coming under control. Our Reserve Bank was expected to follow suit. As we will see further, Trump’s policies may be inflationary so that the rate-cutting cycle may be shortened. If inflation raises its ugly head, rates may go up again.
International Policy of the U.S.: Trump has a reputation for being erratic & unpredictable in his foreign policy stance. He wants to end the war between Russia & Ukraine & quickly make peace in the Middle East. The world will have to observe carefully how he achieves that goal. There is a perception that Trump cannot be relied upon, so smaller countries that depend on implicit or explicit U.S. military support might get insecure and try to procure their own state of the art weapons. Defense manufacturers will benefit as countries increase their nuclear and military spending, but resources will divert from productive uses.
Trump’s policies may completely change the world order as geopolitical risks may wax and wane depending on his stance. A complete change in the world equilibrium will require top-shelf negotiations. Trump’s list of advisors, like Elon Musk, are known to be impulsive and aggressive. For better or for worse, we believe that the status quo of power balance will change for sure. Trump seems to be driven more by transactions than philosophy; the country that provides the sweetest & juiciest deal will be rewarded. Self-righteous leaders can go to hell.
Currency: Though Trump favors a weaker dollar, his win has resulted in a massive rally in the dollar, with emerging market currencies instantly depreciating by 0.5 to 2.5%. For currencies, these are huge moves. After Trump’s win, the market expects a strong U.S. and questionable GDP growth in emerging markets. Underdeveloped economies will have to find their feet against the sweeping changes that Trump is expected to bring about in trade and commerce. If Trump levies the promised tariffs on China, they will inevitably devalue their currency, the Yuan, and all E.M. currencies, including the INR, will have to follow suit to remain competitive. Although RBI has a massive war chest of $ 600 billion reserves, it will presumably use it only to curb volatility and not defend any level.
Coming to Indian equity markets, as of today, most indices are about 10% lower tha their all-time highs. In the last month, foreign institutional selling of over INR 1.5 lac crores worth of equity resulted in an overdue correction.
New enrolments in the Systematic Investment Plans in equity mutual funds have slowed slightly, but lumpsum inflow has remained strong. With the rise of sticky solid retail & domestic participation, the influence of foreign institutional flows has reduced meaningfully on our equity market. It’s worrying, though, that retail doesn’t acknowledge that the corporate results show a slowdown and a decline in profits. For the September 2024 quarter, the cumulative profit of 1,353 listed Indian companies that have reported their results has decreased by 0.6% year-on-year (Y-o-Y), marking the first decline in cumulative earnings in eight quarters.
Investors also need to remember that in 2016, when Donald Trump was first elected president, emerging markets experienced withdrawals for several months after the election. As Trump implemented protectionist policies, bond yields rose and stayed high until early 2019. Foreign investors continued to withdraw funds from emerging markets during that period.
In our last blog before the U.S. election, we had advised caution in equity markets, citing higher valuation. Indices have fallen 10% odd since then, but so have corporate profits. Sentiment hasn’t turned totally bearish yet, but the future is uncertain at best. Going forward, we believe equity markets will not be unidirectional, where you can throw money at it mindlessly and pick up returns. Intelligent investors should stay on the sidelines and be discerning in the medium term.
On a positive note, Trump’s binary policies will result in a few clear winners, as a period of turbulence can throw up some opportunities that we can grab if we are patient.
Jigar
Super article !!! Giving clarity on the expected volatility in the future!! Hope Trump has learned from his first stint and isn’t as impulsive as before.