 "US Presidential Debate")
Global financial markets are keenly observing and are in a wait-and-watch mode as the race for the US Presidential elections gets underway with the first-ever presidential debate.
Given that Donald Trump has no track record as a policymaker, while his economic nationalism and campaign bravado has made for unclear and sometimes inconsistent statements / stances on key issues, experts say this makes it particularly hard to confidently predict what he would actually try to do.
In the Indian context, analysts at Nomura suggest that a Donald Trump victory could cast a shadow on the fortunes of Indian information technology (IT) companies, which may be negatively affected by immigration and outsourcing policies.
“An H-1B crackdown under Donald Trump would lower the profitability of Indian IT companies (due to higher wage costs) while potential restrictions on business process outsourcing (BPO) could also hurt revenues,” analysts at Nomura said in their July report – ‘Trumping Asia’.
“The large weighting in the equity index of IT firms (~19% in the MSCI-India), which may be negatively affected by immigration and outsourcing policies, dampens our outlook somewhat,” it adds.
Expecting an initial negative market reaction, Nomura prefers exposure to military equipment makers, defensive stocks and yield plays as a global investing strategy; and recommend an ‘avoid’ on companies that have US exposure in China industrials, Indian IT and Korean auto stocks.
That apart, Nomura expects Trump presidency to hurt Asia’s GDP (gross domestic product) growth and could ultimately drive cost-push inflation, and impart smaller trade surpluses and looser macroeconomic policies.
“At this early, speculative stage, our analysis indicates that South Korea and the Philippines would be among Asia’s most vulnerable in terms of both economic and geopolitical channels, while India and Thailand seem among the least exposed,” the report says.
IMPACT ON EQUITY MARKETS
Nomura expects an initial negative reaction in global equity markets in anticipation of higher policy uncertainty (both domestic and foreign) and heightened strains on the most important bilateral relationship in the world – that between the US and China.
“Indeed, 56.7% of our investor survey respondents expect the S&P500 to fall more than 3% in immediate reaction to a Trump victory, with a further 28.3% expecting a drop of 1-3%. However, beyond that, the multi-month impact on the overall direction of equities is unclear,” the report says.
Adding: “Specifically, and excluding factors other than simply the election result, we would expect equity markets in Hong Kong / China, Korea and the Philippines to be most affected, with India, Singapore and Indonesia in the next grouping, and Thailand and Malaysia falling into the least affected camp.”
IMPACT ON DEBT MARKETS
As regards the debt market, Nomura expects India rates markets to remain supported despite a Trump victory with local idiosyncratic factors remaining more important. A Donald Trump victory, Nomura says, would make central banks shift their bias further towards easier-for-longer policies.
Rates markets in Korea, India, Malaysia and Australia would benefit in such an environment, Nomura says, while Hong Kong and Singapore are likely to underperform US rates. An expectation of a more dovish US Federal Reserve (US Fed), combined with poor risk sentiment, would likely lead to a flattening bias in regional rates curves.
“Indeed, we believe that even a deterioration in global risk sentiment should not affect the Indian rates markets substantially. In fact, given attractive valuations in India and the relatively insular nature of the market, we would expect India bonds to be preferred relative to other Asian bonds,” the report suggests.
