Donald Trump is elected the President of America and market reaction is one of extreme risk aversion. Asian equities have fallen sharply including the Sensex & Nifty that are down close to 4%. US equity futures are down 5%. The USD is down against the Euro and Japanese Yen while ten year US treasury yield is down. The INR is down marginally against the USD while the ten year Gsec yield is down 13bps. Table 1.
Equity markets are fearing the repercussions of a Trump victory on the US economy and that fear is having a knock on effect on global economies. However as mentioned in my podcast on “Markets and Trump Victory”, the fears could be largely unfounded. US economy is dominated by the private sector and political change should ideally not have an effect on business performance.
The Fed too is unlikely to change its stance on the strength of the US economy as unless data proves otherwise, Fed rate hikes will be on track. The Fed will not act on market fears of Trump.
Markets initially move the way they want to when expectations do not come about but then also tend to take stock of underlying fundamentals before deciding on a longer term direction. At this point of time, with US economy seeing unemployment rate at close to long term averages and inflation keeping its head down, the fundamentals look reasonable enough to warrant slow normalization of interest rates by the Fed.
The Sensex and Nifty fell in sympathy with global markets but given optimism on the economy on the back of strong policies such as surgical strikes on black money (Read our analysis on Demonetisation) and on the back of easy interest rates, markets are likely to bounce back.
The INR has not reacted sharply to Trump’s victory while bond yields have fallen in anticipation of surge in deposits in the banking system. Corruption is also likely to come off on government’s willingness to tackle the issue head on and that will lead to more investments coming into the country.
Donald Trump, while antagonizing businesses, countries, religion, genders and communities, is unlikely to follow up on his rhetoric given that he will have to prove that his policies are towards improving the economy so that Americans can enjoy the benefits of a better economy. He is more likely to send out soothing statements to markets, businesses and political leaders in order to calm down fears.
At this point of time, there is nothing close to the excesses in markets seen prior to the collapse in 2008. Central banks have taken up their balance sheets four fold even as consumer leverage, as seen by sharp fall in credit growth in both the US and Eurozone, has come off. Governments too are in austerity mode rather than spending for economic growth given high debt levels. Hence, economies are seen as limping back to normal even as central banks keep liquidity cheap and easy.
Buy into the fall.