Feb 7, 2017

Impact of Donald Trump on Indian Stock Markets / Companies / Sectors

Possible impact of Donald Trump on Indian Stock Market
Which Sectors Will be affected positively or adversely due to Trump Presidency
Impact of Donald Trump on Indian Stock Markets / Companies / Sectors

These days some stock traders are following Twitter more than macro data or financial statements.
When President Donald Trump tweets about a public company, the market listens. In fact, Trigger, a company started by three Cornell Tech students, has incorporated a "Trump trigger" in its app that alerts users to companies mentioned in the man’s tweets. Should this pattern continue, how should the market read the Trump tweets, and how to trade on them?
The ‘risk-on’ rally spurred by animal spirits, or Trump’s promise to “make America great again”, is now gradually pausing for a reality check on long-term implications.

The Trump Agenda
Looking into the crystal ball has just got a bit more challenging, but Trump’s broad agenda, under six broad heads : America First Energy Plan; America First Foreign Policy; Bringing Back Jobs And Growth; Making the Military Strong Again; Standing Up For the Law Enforcement Community; and Trade Deals that Work For All Americans.  
Domestically, Trump’s policies look reasonably clear – the focus is on creating jobs and increasing spending. So, if the US Congress is willing to play along, expect growth to pick up, thereby rekindling inflationary expectations, a faster pace of rate hikes and the continued strength of the US dollar.   In fact, 2017 could herald the re-emergence of fiscal spending in developed markets. The forces that drove Brexit, elected President Trump and have for long been simmering in Europe are primarily about lack of growth, leading to a lack of jobs or low-paying jobs.
These should bode well for emerging markets including India with the positives in the long-term likely outweighing the negatives for certain sectors. India could see the emergence of new export sectors and companies in the metals, engineering and industrial segments, which should be good news for the long term and for the 'Make in India' initiative.

Indian IT –
Smarter guys to weather the storm The noise and news around visa rules will impact sentiment as more Bills get introduced in the House/Senate and the Street fears changes through executive orders by Trump. The undertone of these Bills would be an increase in minimum wages, granting of higher investigative powers and changes to the visa allocation process; some bills may seek modest amendments to visa rules while a few others may ask for radical overhaul.
The entire legislative process, would nevertheless, not happen overnight (could take 10-18 months). It is important to note that increase in minimum wages for H-1B workers is applicable only to H-1B dependent employers i.e. companies having more than 15 percent US headcount on visas. Even if the competitive hit Indian companies take is limited to the 15 percent of their employees that fall under the category, they need to reorient their business models. That said, it should be borne in mind that in the long-term, raising minimum wages and driving wage inflation in the US materially above the existing market dynamics will only strengthen the case of further savings through global sourcing. In the interim, amid a steep valuation correction, smart investors should focus on business models that will survive both Trump and the tectonic shift in technology and opportunistically accumulate while the line between the men and the boys is still fuzzy.

Pharmaceuticals –
selective value at deep discount Amid Trump’s largely socialist rhetoric on pharmaceuticals, Indian companies have been second guessing the impact of the new regime on their business.
Though Indian drugmakers, supplying low-cost generic medicines worldwide, see Trump's bashing of American Big Pharma industry as an opportunity for the domestic industry, they are also cautious due to possibility of pricing pressure in their most profitable market. There are widespread fears about local sourcing clauses and higher import taxes as the US is set to promote indigenous manufacturing. Valuations of the Indian pharma sector have corrected by 45 percent over the last 18 months, mainly on the back of regulatory issues and concerns of sharper generic price deflation in the US. The industry is slowly moving towards speciality transition versus pure dependence on manufacturing cost arbitrage to survive. With generic opportunities remaining strong over the next 5 years and data indicating some stabilizing trends in pricing (despite the noise), discounted valuations might provide a good opportunity to leverage the likely relative outperformance of companies with a differentiated business model. The strength of the US dollar could provide the much-needed added competitive advantage for the export-oriented companies.

Commodities –
A beneficiary of ‘America First’ The yield on the 10-year Treasury note has climbed to 2.48 percent from the level  of 1.86 percent it was at on November 8 before Trump’s arrival, on expectations of a pick-up in inflation and real rates. Trump is expected to deliver on campaign promises that include a ramp-up of infrastructure spending and a repeal of rules that critics say have hemmed in the nation’s largest financial institutions. A reduction in taxes also has been proposed. The World Bank has taken note of the same and has predicted that if Trump’s stimulus plans are fully implemented, it could lift GDP growth to 2.5 percent this year and to 2.9 percent in 2018. A surge in US growth could provide a significant boost to the growth of the global economy. The US is still the largest consumer of natural gas and oil, and the second-largest consumer of a wide range of commodities, including aluminum, copper and lead. So the optimism on commodity companies might linger on for little longer.

Oil –
Unpredictable commodity meets unpredictable president President Trump will want to keep oil prices as high as possible (due to higher breakeven cost of shale oil) to ensure that America can keep oil jobs in the country as well as continue on a path toward energy independence. However, he has vowed to destroy ISIS. Very high oil prices wouldn’t help as oil remains a major source of revenue for the terrorist outfit. Moreover, higher oil production in the US would put a cap on the oil price rise. Hence, a net importer of oil like India might stand to gain from moderate oil prices due to the opposing forces at work in this market.

Trade and foreign policies –

The joker in the pack The rabble-rousing business tycoon’s tough trade beliefs and apparent xenophobia are least understood at this stage. In his first week in office, he directed a withdrawal from the Trans-Pacific Partnership. He has recently signed an executive order requiring the “extreme vetting” of citizens of seven Muslim majority countries seeking to enter the United States. While it still remains unclear how Trump’s trade & foreign policy will evolve, it is clear that as a seasoned businessman he will weigh the merit of every deal and shift from multilateralism to bilateralism. Donald Trump’s foreign policy might remain a black box for longer. He has showered praise on President Putin, expressed his love for China while also blaming it for much of America's economic woes. Although India considers America to be a great friend, and Trump has talked tough on Pakistan, he hasn’t quite walked the talk yet. With China overtly bolstering its ties with our neighbour, markets may have to contend with a mercurial, unpredictable friend, more difficult to understand than a constant foe.