Ex president Donald Trump is now the new president elect of United States of America. Trump has been very clear in his election speeches that once he is elected as the president, he would be imposing a 60% import tariff on China. Now, a lot of this can be election talk but let us assume that even half of this is done then it can have far reaching ramifications on China as well as many other countries including India. Once, US imposes tariffs as high as 60%, China will certainly take retaliatory measures. Trump wants to shift manufacturing back to US. We are not entirely sure if this would materialize in a meaningful way. However, if it happens even in a small measure, this could create ripples in US and inflation will shoot up. US Fed will have no other option but to raise interest rates.
Due to rising interest rates and yields in US treasury, FII will continue to sell equities in the emerging market and deploy that money in US treasuries. US treasuries, as we all know, are the safest investments across the globe. If FIIs are getting higher interest rates on their investments in US, without taking any substantial risk, then they would be happy to deploy the funds there.
China on the other hand has huge amount of spare manufacturing capacity. If this capacity is not consumed in the right way, it will not hesitate to dump this capacity in other countries. We expect commodity prices to depreciate in coming months, as a result. The only exception could be precious metals. China may resort to selling US treasuries and start buying Gold in a big way. As a result, one of our core investment ideas is to go long gold and silver.
The FII withdrawal in equities from India, particularly from the large cap companies where they own the maximum, would be negative for Indian equities in the short run. Current trend of withdrawal of FIIs from India Equity markets is likely to continue for several months going forward. While it is always dangerous to make short-term prediction on equities, we still think that another correction of 10 to 15% from the current market levels can’t entirely be ruled out. Impact on mid-cap and small cap stocks would be even more deep as the valuation comfort is non-existent. As it always happens, the second leg of correction would be dominated by significant selling in mid cap and small cap stocks. This is the short-term impact on India and if this turns out to be true it would be extremely brutal. But the real story begins from here and we think that nifty at 20,000 levels would look extremely attractive from the valuation perspective.
It should be clearly noted that over a period of next four years Donald Trump presidency, India will be a major beneficiary. He would look at India as a strategic partner. Trump and Modi have a personal connect and this would help in India’s march towards becoming an economic giant in the future. Trump is largely transactional in nature and every time he comes on the table he would be negotiating. However, US has lot more to gain from India as a strategic partner and Narendra Modi’s, ‘Gujarati’ genes will ensure that India gain substantially from the bargaining process.
Many large corporates in US and Europe will shift substantial amount of manufacturing to India. Real transition of China plus one strategy where India becomes a major beneficiary will play out in the coming years. Just like Apple, there would be more corporates investing out of China and India will be an automatic choice. Sector like pharma, particularly in the CDMO space could be a beneficiary.
Summing up, the elevation of Donald Trump as the next president of United States would be quite dramatic, painful and extremely volatile in the first few months of his tenure. However, as he comes to terms with reality, India will become a prominent strategic partner and an economic beneficiary of his policies. In short term, India equities are avoidable but in long-term they look extremely attractive. Investors should buy in Indian equities with a long-term bent of mind going forward, but in tranches. There could be more pain in the next few months if the market falls further but eventually be extremely beneficial for the investors.
