Mumbai: Even as the Indian equity markets still digest the bumpy demonetisation ride in the near term, they are relatively insulated by the surprise win of Republican candidate Donald Trump in the US Presidential election as compared to their peers, given the strong prospects of a long-term domestic story.
India’s benchmark equity index Sensex has fallen 5.6% since the close of 8 November, making it the third-worst among key emerging markets after Mexico and Philippines, as it grappled with the double whammy of a sudden move by the government to scrap Rs500 and Rs1,000 notes and Trump’s unexpected win.
“The damage done to emerging markets by the Trump election (through higher US bond yields, a stronger dollar and protectionism fears) is less of a problem for India than for most other emerging markets,” said Maarten-Jan Bakkum, senior emerging markets strategist at NN Investment Partners. As of 30 September, NN Investment Partners manages around $224 billion in assets.
“This is because India has relatively low external financing needs and is a relatively closed economy still,” Bakkum said in an email from The Hague, Netherlands.
Globally, market uncertainty spiked following Trump’s unexpected win against Hillary Clinton. The immediate impact was a flight to safety, resulting in a steep sell-off in emerging markets.
Such a sell-off is likely to accelerate with US Federal Reserve chair Janet Yellen signalling the central bank may increase interest rates relatively soon. Her comments along with the strengthening US economic data—such as consumer prices increasing the most in six months in October—make the case for a Fed rate hike as early as December.
However, India is facing turbulence in the near term, as a recovery in domestic consumption is pushed further by at least a quarter or two, which delays its much-awaited recovery in corporate earnings.
Asia’s third-largest economy was likely to see a boost in consumption from a good monsoon which followed two consecutive years of near drought and the implementation of the recommendations of the Seventh Pay Commission. However, the government’s surprise decision to scrap Rs500 and Rs1,000 notes on 8 November has dashed the hopes of such revival in the near term.
Brokerages and ratings agencies have cut their GDP growth estimates for fiscal year 2016-17, as the paucity of the new currency notes hits cash transactions, and as consumption demand also hits a roadblock
However, what works in India’s favour over the long term is that it is not so dependent on exports, as much as most of its other emerging market peers are, and that its macro-economic parameters are relatively strong. This makes it relatively insulated (though not completely decoupled), from the global shocks that hurt flows into the emerging equity markets.
“India has a strong domestic story—with attractive demographics and low indebtedness—with the current policy of positive real rates, falling fiscal deficit and focus on boosting FDI (foreign direct investment),” said Ridham Desai, head of India research and India equity strategist at Morgan Stanley.
“ These make India’s macro and equity markets less sensitive to global events over the medium term,” added Desai.
That has been the popular view.
In a 14 November interview, Christopher Wood, chief equity strategist and managing director of CLSA, said Trump’s victory does not impact Indian equities as much.
“It does not mean anything for India, as it is more dependent on the domestic story. The impact on other emerging markets so far is that the US bond market is sold off, and that has led to pressure on emerging market debt, which is selling off,” Wood said in the interview.
“People made a lot of money in emerging market bonds this year, and are now rushing to sell. However, the Indian debt market is not the worst hit. Indian equities, right now, are completely driven by the domestic development of demonetisation,” Wood added.