Change in US government will have an optimistic effect on world economy and markets

It was widely known and expected that the long-term outlook of world’s financial market’s will be decided by the political developments in the US, as it will have an implication on the world’s political arena, policies and stimulus. The win to democrats is expected to be more positive for a free-trade world and equity markets for the long-term.

During the election period, it was viewed that even if the election goes to republic (as it was being closely contested), it will not be negative for the world economy and equity markets, especially in the short to medium term, since a stimulus was being considered in the US, Europe, and Domestic economy.

Similarly, the ongoing international policies were not likely to be altered soon, without impacting the rebound happening in the economy and its outlook. Of course, the extent of benefit may have varied low due to differences in the method of policies, working, and size of stimulus in the US and the rest of the world.

The world financial markets were hoping and tilted for a change in guard, to Democrats, in anticipation of a more business friendly and pro-globalization policies. The other factor was that Democrats were more supportive for a big fiscal and monetary stimulus compared to Republicans.

The Republican Party is expected to hold a strong position in the Senate, the US upper chamber, which may impact the size of stimulus. More clarity is expected by the end of December regarding the size and effect of the stimulus, post the discussion in the House of Representatives and the Senate.

However, we can hope that it will be big and strong enough to drive the market through the covid-19 period. The expectation has come true and the global market is celebrating the move with MSCI World Index up by 8 percent on a weekly basis.

In context of India, be it Donald Trump or Joe Biden, it was not expected to bring in a big difference. It was expected to have diverse impact on other countries and continents, since Republicans have difference of opinion with countries like China, Europe, and on policies like climate change and trade. Irrespective, a big stimulus was expected post the US election, which will be positive for the world economy and emerging markets. And India is expected to garner good coupling effect in the economy and FIIs inflows.

It was more or less neutral for India, some positives and negatives, since both the US parties are bullish on India and want to develop a stronger bilateral relation as a strategic partner. The Trump government wanted to develop a key defence and strategic partnership with India to fight against China. Biden is also expected to be tough against China, providing more importance to domestic economy and job generation. However, Biden is considered to be more pro-globalisation, and a final view on China policy will be known in the future.

In the pro-globalisation policy, India is expected to be the key beneficiary in trade, and mainly in sectors like IT, pharma, agri and chemical. The Indian government is also working to develop a strong manufacturing hub in the country along with reforms to boost the environment of business - like ease of doing business, cutting tax, reducing cost of capital, and subsiding large manufacturing capacities through greenfield projects with domestic and foreign corporates.

The other factors which helped the market, firstly is FEDs decision to hold rates with a wait-and-see approach amid the election period and weak economy. The Federal Reserve has maintained its large open-market operation and is committed to act with more monetary measures as required in the near-future since economy is well below the pre-pandemic level.

Secondly, strong bounce in Q3 economic activity in the world and India, for example, US GDP rose by 33.1 percent on an annualized basis. In India, many factories are working near 100 percent capacity due to pent-up demand supported by festival season. A part of which is visible from the ongoing Q2 results and management commentary which is expected to flourish more in Q3. The other matter which helped the market was positive bias over banking stocks due to a near end to the moratorium case in the Supreme Court.

A final verdict is expected on November 18, mostly in-line with the market view, maintaining the interest of lenders and borrowers with no loss to the public and banking industry supported by fiscal cost to be undertaken by the government, by bearing the cost of 6-month moratorium.

Nifty Bank Index rose by 12 percent in the week and 18 percent on a MoM basis. In the last 1 month we have been suggesting to add more exposure in banking sector and continue to do so.

The markets pressure or volatility is expected to ease in the future as the US outcome is in-line with the markets hope. Though some volatility can be expected in the future, during the discussions and approval of stimulus size and timing in the US house, but not expected to be very action-packed.

The trend of US dollar is likely to be weak in the short-term as Democrats are more supportive of a large stimulus package which will spill-out of the US economy to the other parts of the world, looking for opportunity, given its size and low yield available in the US. It can take our Indian market to a new zone over-weighing worries over rising COVID-19 cases backed by a strong performance in sectors like banking, IT, pharma and exporters.

We expect that this momentum is sustainable aided by positive Q2 results, favourable economic data, strong FII buying, and expectations of an additional stimulus package in India, though expectations about the size of domestic stimulus is low this time.

(Vinod Nair, Head of Research at Geojit Financial Services)