US Prez Election weighing on Indian Stock Market

Tomorrow is D-day, when people in the United States will vote for the 45th President of their country. History will be created soon after one of the most controversial US Presidential elections. While Hillary Clinton could be the first woman US President, Donald Trump could be the first President without any preceding political or military experience. Having delayed in the race for a significant period, Trump has been cutting into Clinton’s precedence after the reopening of investigations by the FBI into Clinton’s emails.

Financial market analysts note that a victory for Donald Trump will pilot in a period of ambiguity in economic, social and foreign policies. Equity and currency markets have turned chaotic as the gap between the two candidates narrowed in opinion polls.

A further decline in stock prices is probable if Trump wins while a mild rally is expected if Hillary Clinton does.

Glance at the Stocks:

Investor worries over the US presidential election outcome sent Indian shares to four-month lows ahead of Tuesday’s vote, and the increased the risk to policies such as global trade and shifts in political stance should keep global markets on the edge in the coming week. The unrest, however, would be a chance to grab bargains in an expanding economy.

The top-30 S&P BSE Sensex and the broader 50-share Nifty50, both closely tracked by big overseas and domestic investors, slipped 2.4 per cent each in their biggest weekly fall in more than a month as foreign funds casted off shares worth more than $100 million. Today, a day before the election, Nifty share price opened at the positive note against its last close price. Opinion polls signifying that maverick Republican candidate Donald Trump is closing the gap on Democratic nominee Hillary Clinton are likely to cause more restlessness among money managers.

There is a belief that export-driven sectors such as outsourcing and pharmaceuticals, that get considerable revenue from the US, could face heavy season if Washington tightens the flight of jobs and restrict imports. While Trump’s expression on economic issues has been more extreme, Clinton has not been far behind either.

Investors should look at shares of companies that are driven by domestic demand, which is picking up and would continue as economic growth accelerates. In other words, a correction in share prices would be a chance to accumulate.

A Peek in the History:

An analysis of the change in Sensex and S&P 500 values, post one week the date of the Presidential election, shows a very high positive correlation of 0.97 between the two indices. This means that Indian equities will drop or swim with their US counterparts in the coming week.

However, the impact of the elections does not last long and the structural drift in the market tends to take over in Indian stock markets. In November 2012, the Sensex slipped 1 per cent in the week following the election. But it recovered to gain 3.56 per cent in the following month, aided by foreign investor buying. Similarly after the 1996 election, Indian markets fell sharply in the following month, as the structural trend was down since 1994.

FDIs and FIIs:

Foreign investment flows into India also do not appear to be affected by these elections. Barring 2008, FII flows into the Indian equity market have been upbeat in the months in which US Presidents were elected. FDIs have also seen a rise.

For instance, on Friday, Suzuki Motor Corp would put in about $970 million in a second vehicle production line at its new plant in Gujarat. India is the largest market for the Japanese car maker and its unit, Maruti, is already spending $2.8 billion for Gujarat to set up six production lines competent of producing 250,000 vehicles each.

Also, APG Asset Management, a Dutch pension fund, and Rothschild family-backed investment firm The Xander Group are jointly investing $450 million in retail assets in India, where consumer spending is likely to top $3.6 trillion by 2020.

Meanwhile, the two firms declared on Friday that they have bought three shopping centers, totaling about 3.5 million square feet, for $300 million, in Bengaluru and Chennai in southern India, and Surat in the west. The remaining $150 million will be used to buy, or build new retail real estate assets.

Currency Impact:

The dollar’s situation as the safe haven will stand it in good stead if there is a market collapse following the election result. In 2012, when US equities declined, the dollar rallied 0.50 per cent in the week after the polls. The rupee fell 0.55 per cent in that period, impaired by a stronger dollar as well as the increased global risk aversion.

Similarly, in 2008, the S&P 500 fell 10.6 per cent in the week after the poll, the dollar rallied 2.8 per cent and the rupee declined 0.84 per cent. So, the rupee could be adversely impacted, at least in the short term, if Trump wins.