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The US presidential election results due on 3 November
The US presidential election results due on 3 November

Indian equities have a lot riding on how US votes

The US presidential election results due on 3 November are being keenly watched, as the outcome will have implications for the rest of the world, and for global equities, besides deciding the stance towards China. Mint explores how it could impact the Indian equity indices.

The US presidential election results due on 3 November are being keenly watched, as the outcome will have implications for the rest of the world, and for global equities, besides deciding the stance towards China. Mint explores how it could impact the Indian equity indices.

Are markets affected by political outcomes?

Typically, the performance of stock market indices depends on a host of factors, both domestic and global. Some key factors include the underlying macros, such as interest rates, inflation, economic sentiment and domestic policies, which are dependent on the outcome of the political developments across the globe. Therefore, domestic election outcomes have the potential to change the policy regime, which in turn, has a bearing on the performance of the stock markets. Similarly, global political outcomes, too, result in a change in domestic policy expectations, which influences stock markets.

How have US markets responded to polls?

A highly sophisticated economy, such as that of the US, with one of the most advanced financial systems of the world, has a lot riding on the American political scenario. Typically, in any given year, US equities on an average register 8.5%-plus growth.

This is in stark contrast to the 6% growth recorded in American equities in a pre-election year. This muted performance is primarily due to the looming uncertainty surrounding the outcome of the US presidential elections, and its bearing on the key economic policies that will be subsequently adopted during the tenure of the new president.

Policy outcome
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Policy outcome

How do markets typically respond after the elections?

Post-elections, the uncertainty is reduced significantly as both the US parties have predictable economic policies in terms of fiscal deficit, interest rates, inflation, and public expenditure. If a new party comes to power, markets on an average register 5%-plus gains, and re-election sees 6.5% gain. Investors generally prefer bonds as a safe asset in post-election year over equity.

How will the US polls impact India relations?

The 2020 election results will have significant implications on the US policy on key issues related to foreign policy, strategic alliance, and the outlook on global trade. The development will determine the extent of cooperation between the two countries. Irrespective of the political outcome, there will be continuity with regards to fostering a deeper strategic, economic and technological partnership between India and the US. The only variable that would be affected by the outcome is the pace of deepening the cooperation.

What about the effect on Indian indices?

Political implications of the outcome of the presidential poll would determine expectations around future policies. The US President’s take on deficit, existing US debt and likely interest rates will have ramifications on global equity markets, including India. US Federal Reserve appointments will also play a key role. However, with the current weakness in global economic activity, it is highly unlikely that the prevalent aggressive monetary and fiscal policy will be reversed soon.

Karan Bhasin is a policy researcher.

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