Indian Prime Minister Narendra Modi shakes hands with former US President Donald Trump before their meeting at Hyderabad House in New Delhi on February 25, 2020.
Mandel Ngan | AFP | Getty Images
This report is taken from CNBC’s ‘Inside India’ newsletter this week that brings you insightful and timely news and market commentary on the emerging powerhouse and the big companies behind their meteoric rise. Like what you see? You can subscribe here.
The big story
Donald Trump has decisively won the US presidential election, becoming one of only two US leaders to regain the keys to the White House after some time out of office.
As in 2016, investors are grappling with the political uncertainty surrounding his presidency and what might come in the following year.
However, the results are likely to be very different from eight years ago – at least as far as India is concerned.
manufacturing
At first glance, Trump’s “Make America Great Again” campaign appears double-edged and at odds with Prime Minister Narendra Modi’s “Make in India” initiative.
Most analysts say taxes on goods imported from China into the United States will likely benefit India, as companies shift manufacturing to the South Asian country to avoid tariffs. Global trade has changed dramatically over the past four years — benefiting India — with President Joe Biden retaining much of the tariffs Trump imposed on China.
“Potential tariff or non-tariff barriers on Chinese imports into the US and Indian domestic manufacturing with ‘Make in India’ could be positive for India.” [electronics manufacturing services] Companies in areas such as PCBs [electric circuits]“Semiconductors, mobile phones, cables and wires, etc,” said Aditya Suresh, head of India research at Macquarie Capital, citing cable and wire maker Polycap as an example of stocks that would benefit in this scenario.
Analysts also point out that the benefits from reorienting supply chains, with companies based in India and outside China, will outweigh the impact of global tariffs on all goods imported into the United States.
However, Trump took unilateral actions during his previous term, targeting India with tariffs by removing the country from a special trade program known as the Generalized System of Preferences. Tariffs have been applied to about $5 billion worth of exports from India to the United States since 2019, according to the Observer Research Foundation.
Tax increases and tax cuts
Import duties could raise consumer prices in the United States and push inflation up along with bond yields. High US Treasury yields often quickly usurp money away from emerging markets, including India, in today’s sticky market environment.
Why invest in high-risk stocks abroad when Uncle Sam is offering 4.5% per year risk-free on your investment?
Foreign investors have already started using their portfolios, selling $1.5 billion worth of Indian stocks this month, on top of $11 billion in October. Last month, the Nifty 50 index fell by 6% and recorded its worst monthly performance since March 2020.
Reducing the US corporate tax rate to 15%, if Republicans control both houses of Congress, would also boost US stock markets. This makes it difficult for Indian stocks to outperform at a time when Mumbai-listed stocks begin to struggle to meet earnings expectations.
Immigration
President-elect Trump’s campaign has focused on reducing illegal immigration in the US, and as long as the new administration’s focus remains on “illegal”, the Indian IT sector remains protected. However, if unemployment continues to rise, as it has over the past few quarters, the risks of political uncertainty become front and center.
“IT services may see an impact with the US being the dominant end market, as well as potential changes in immigration, if any,” said Citi economists Samiran Chakraborty and Baqir Zaidi.
US-listed companies like Tata Consultancy Services, HCL Tech and Infosys rely heavily on work permits to bring employees from India to the US. However, over the years, the share of foreign workers employed by these companies has reportedly fallen to less than half, making them more resilient to changes in visa rules. In addition, since the COVID-19 pandemic, most companies have reduced their costs through remote work.
energy
On the one hand, analysts expect Indian interests to align with those of the United States regarding oil prices. Trump’s previous term, whether intentionally or coincidentally, saw moderate to low oil prices. Market observers expect this to be repeated in his second term.
Since India imports more than 90% of its oil needs, New Delhi is likely to welcome any move by the United States to keep oil prices low.
A quick resolution to the war in Ukraine – a promise Trump made during his election campaign – would have a negative impact on oil prices.
On the other hand, India also hopes to become an exporter of renewable energy products, and judging by the stock market reaction to the news of the US election results, this sector is unlikely to be in Trump’s good books.
Shares of Mumbai-listed wind turbine maker Suzlon Energy fell after the US election results. Although the company gets just 1.5% of its total revenue from the United States, sales have grown 42% over the past year, according to FactSet data. Will it continue to grow in the future?
“The potential anti-ESG approach of the next US administration may not be positive for a portion of India’s exports,” such as solar panel module makers, said Sanjeev Prasad of Kotak Institutional Equities.
Need to know
Jio, the telecom subsidiary of Mukesh Ambani’s Reliance Industries, is reportedly planning an IPO in 2025. The company is now the largest telecom company in India, with 479 million subscribers. Two sources familiar with the matter told Reuters that Ambani believes Rio now has a stable enough revenue stream to list publicly. Reliance aims for Rio’s listing to surpass Hyundai India’s $3.3 billion listing, making it the largest IPO in India, according to the first source.
Reserve Bank of India is prepared for volatility in the US. Two sources familiar with the bank, who requested anonymity due to the sensitive issue, said the central bank’s large reserve of foreign exchange reserves could be deployed to defend the rupee. Any new US tariffs imposed by the next US president on China, as well as a strengthening of the dollar, could lead to outflows of the local currency and increased imported inflation.
An Indian auto stock is on Goldman Sachs’ top picks list. Chandramouli Muthiah, vice president of equity research at the bank, wrote that the stock has a “unique pipeline” in India’s auto market, and gave it a potential upside of 25% within 12 months. [For subscribers only]
What happened in the markets?
Indian stocks appear to be continuing their downward trend. The Nifty 50 index fell 0.5% this week, weighed down by the US election results. The index rose by 11.36% this year.
Despite the big moves, the yield on India’s benchmark 10-year government bond remained almost flat compared to last week at 6.78%.
Stock chart icon Stock chart icon
On CNBC TV this week, HDFC Securities CEO Dheeraj Riley noted that Indian markets have been trading at a high valuation over the past few years, and have a nearly 90% premium over other emerging markets. Reilly cautioned investors against tempering their expectations, as returns in the range of 12% to 15% are considered favorable.
Similarly, VK Vijayakumar, chief investment strategist at Geojit Financial Services, noted that the recent market correction in India was rational because “valuations were at high levels”. However, on a sector basis, Vijayakumar noted that he is bullish on large-cap private sector banks whose “valuations, so far, are not only moderate but also attractive”.
What will happen next week?
Sagility India, a healthcare company, is listed on Monday, while shares of ACME Solar Holdings and food delivery company Swiggy are publicly traded on Tuesday.
Meanwhile, keep an eye on inflation reports from China, India and the US next week.
November 9: China’s inflation rate for October
November 11: US Consumer Confidence Report
November 12: October India inflation rate, September industrial and manufacturing production, and Sagility India IPO
November 13: US October CPI, ACME Solar Holdings IPO, Swiggy IPO
