Web Special: US poll outcome and its impact on global markets

Analysts say the key now is how the 'fiscal cliff' issue will be tackled

Barack Obama won a second term as the President of the United States after defeating Republican challenger Mitt Romney in a closely fought battle. The outcome came in as a relief for the global markets that had been grappling with uncertainty ahead of this event.

Back home, the Sensex and Nifty ended the day 0.4 per cent and 0.6 per cent higher, respectively after rising as much as 0.9 per cent in intra-day deals. Among the sectoral indices, the BSE Realty index was the top gainer, surging nearly 3 per cent. Gains were also visible in information technology (IT) pack whose fortunes partially depend upon the key US and European policies. Financial Technologies, MphasiS, Infosys, TCS, Tech Mahindra and Wipro logged gains in the range of 0.4 - 2.8 per cent.

Says Saurabh Mukherjea, head of institutional equities at Ambit Capital, “The markets have given a muted reaction to this event, which I feel is a sensible thing. With this event out of the way, the element of uncertainty since the past few days relating to the outcome will disappear. Obama is a familiar face for the Indian markets and I feel that going ahead, the markets will be relieved that he is back at the helm,” Mukherjea says.

Most Asian markets ended the day in the green after a nervous start with gains ranging between 0.5 – 0.8 per cent. The reaction from the European markets was, however, guarded ahead of the key vote in Greece for an austerity package that is needed to secure a fresh injection of aid and avert bankruptcy. Gains ranged between 0.5 – 1 per cent after a firm start.

So, what does this victory mean for the global markets, especially India? Analysts say that the key focus will now shift to how the US tackles spending cuts and tax increases that are set to be automatically triggered at the end of the year, also termed as the “fiscal cliff”.

Says Nandkumar Surti, MD and CEO, J.P. Morgan Asset Management, "For Obama, getting past the fiscal cliff will be an important milestone to decide the way ahead for the economy. Towards this, a tax compromise between Democrats and Republicans is imminent. Its timing will be important to decide its impact on the markets. The sooner a decision is announced, more positive it is for the US economy."

“However, the overall global economic temperament will be boosted by the growth of the US economy, so the developments in the next few months will be important to watch out for. Overall, the stock market has a natural affection towards certainty. The clean re-election clearly puts a big uncertainty behind us, and that in itself is a positive for the global markets,” Surti adds.

On the policy front, Sonal Varma, India economist at Nomura suggests that the outcome will translate into continuity of monetary and fiscal policies. “We expect some moderation in US growth next year. For India, the outcome is broadly status quo as regards the key policies,” she said.

However, Saket Misra, managing director —strategic equity solutions, RBS Global Banking & Markets believes that broad expectations were that a Romney win may have been followed by an equity markets lift. “In fact, that's normally the immediate reaction post most elections, as uncertainty reduces. Unlikely this time. However, the real issue - facing Obama and would have equally faced Romney is the fiscal cliff and the need to break the logjam in the US Congress and find a solution. Until that happens, we will see continued high levels of volatility in the markets," he says.

"I do not think this particular result has a major bearing on the Indian equity markets – which will remain driven by global economic issues, liquidity, uncertainty and our own corporate performance," Misra adds.

"For fixed income, an Obama victory is arguably supportive both in terms of likely mounting concern over the fiscal cliff and relief that the way remains open for additional Fed stimulus (Romney having been critical of QE). For risky assets such as equities, the implications are somewhat more mixed with the prospect of surging fiscal headwinds clearly negative but with this counterbalanced to some degree by hopes of a monetary offset," notes a rates strategy report from Rabobank International.