US election likely to be net positive for Indian equities2 min read . Updated: 29 Sep 2020, 11:53 AM IST
- A loose monetary policy stance by the Fed augurs well for EMs such as India: Experts
- A disputed election in the US will initially put downward pressure on the dollar and risk assets
MUMBAI : Markets are anticipating the US presidential election to be hotly contested, resulting in unexpected policy uncertainty and volatility in equities across the globe, including India.
Three critical factors, such as the US trade and foreign policy, monetary policy and fiscal spending on infrastructure, may have an impact on markets and capital flows, based on the potential outcome of the election, according to analysts.
However, the US election is expected to have a positive impact on Asia Pacific markets attracting capital flows. “I think the US presidential election will have a positive impact on Asia Pacific market inflows," said David Chao, global market strategist, Asia Pacific, Invesco. Emerging markets Asia equities will strengthen from current levels by the year-end as the election overhang is removed and investors refocus on fundamentals, such as an improving economy and a likely covid vaccine in 2021, he said.
“Brexit uncertainty, escalating covid cases in Europe, a weakening dollar because of continued fiscal stimulus bazookas and the US Federal Reserve’s continued dovish monetary stance should also help gravitate capital flows to the APAC region," he said.
A disputed election will initially put downward pressure on the dollar and risk assets. However, the Fed could intervene with some extraordinary actions, such as temporary cut in policy rates below 0, or announcing a large-scale asset purchase plan to stabilize the capital markets, he said.
A loose monetary policy stance by the Fed augurs well for emerging markets, such as India, which are typically considered as risky assets. Fed’s bond buying schemes and low interest rates following the coronavirus outbreak has resulted in a flow of $11.22 billion by foreign institutional investors (FIIs) into Indian equities since May.
“Ordinarily we are not expecting the US election to significantly impact Asian equities, but with equity markets already trading one standard deviation expensive, events could cause much bigger moves than normal," said strategists at UBS Securities Asia Ltd.
India is one of the top countries in terms of the yield spread over the US treasuries and could perhaps experience more capital inflow, should the US interest rates remain low for long and global investors seek our high-yielding assets, said UBS. “South-east Asia plus India are among the economies most likely to benefit, while North Asian exporters and Australia are relatively immune to the easy liquidity, directly," it added.
Indian markets have run up by almost 50% since the March lows, in sync with global markets. The rally was mostly lifted by FIIs’ money, but domestic institutional investors have been on a selling spree for the past few months.
“This first phase, known as ‘hope rally’, is always the strongest part of a new growth cycle, and returns are very sharp. However, returns in next six months will not be as sharp as it was in last 3-4 months, rather it will be sailing through a lot of volatility in the market due to the upcoming US election," said Neeraj Chadawar, head, quantitative equity research, Axis Securities.