How the Biden Presidency can affect the Indian Equity Market

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How the Biden Presidency can affect the Indian Equity Market

January 19, 2023
How the Biden Presidency can affect the Indian Equity Market

Markets in India ended at record levels in the days and weeks following the news of the victory of Joe Biden in the US Presidential Elections. Towards the end of 2020, the Indian markets had been rallying, touching new highs every few days. The rally picked up momentum soon after Joe Biden was declared as the winner of US Presidential Elections. Mr. Biden will take the oath of office as President on January 20, 2021.

So, what does the Biden Presidency hold for India and the Indian market going ahead?

A weaker Dollar = Boost for markets

The Biden win brings with it a promise of fewer tariff threats and a foreign policy that promotes world trade. Analysts feel that this will lead to a weaker Dollar and boost emerging markets such as India.

Major multinational banks such as JP Morgan have stated that emerging markets are expected to outperform others. In fact, JP Morgan recently upgraded India and South Africa to Neutral from Underweight.

A weaker Dollar has a direct impact on the Indian markets as India imports more than it exports. According to the analysts at JP Morgan, on average, a 1% decline in the Dollar’s value has roughly led to a 3% growth in stock performance in India.

A weaker dollar also boosts export-oriented industries such as IT Services, and one can see the stocks of companies in such industries to perform well.

Due to President Trump’s protectionist policies and trade wars, the US Dollar strengthened against all currencies, including the Indian Rupee. In 2020, the Dollar rose sharply as a reaction to the pandemic but has since weakened steadily over the past few months.

H1B Visas for Indians would potentially mean more remittances from the US

There are indications that a Biden Presidency will be good for Indian Technology stocks, which have already been performing well through the pandemic. Crucially, Mr. Biden said that he would lift the freeze on the granting of H1B visas. In June, President Trump had put a freeze on such visas, which is eagerly sought after by Indians in the IT sector. The tech giants in the US have also in the past expressed the need for these visas to employ a skilled workforce from countries like India and China. Typically, many who work in US send back money to their parents who live in India, which in turn also helps in consumer spending and a boost to domestic demand.

A renewed focus on global trade may help export-oriented industries in India

There are also hopes for deepening trade ties between US and India. Many analysts believe that the new President may not completely call off the trade war with China, but he will aggressively build back old ties and forge new relationships. The new President is expected to move away from the tariff-levying policy under President Donald Trump, which led to a lot of uncertainty among businesses across the world. There have been talks of rethinking global supply chains among companies and government, which were badly hit during the pandemic due to an over-reliance on China. With companies and governments looking for new countries to set up sourcing and manufacturing hubs, India could emerge as a key player. 

Historical trends

Typically, the US stock market has risen only 42% of the time in the month of November of an election year. However, December has always been a good month for the US markets in an election year. An analysis after the 2016 elections showed that, typically, Indian equities sink or swim with their US counterparts in the week following the US elections. However, the analyses also pointed out that the impact of the elections does not last long, and the structural trends and underlying fundamentals in the market tend to take over in Indian stock markets.

Foreign investment flows also do not appear to be influenced by election results. Barring 2008, FII flows have been positive in the months in which US Presidents were elected. The current rally has also been attributed to FIIs, who have been on a buying spree and have invested around Rs 13,000 crores in November alone. Analysts expect FIIs to remain bullish in the near future.

Fundamentals matter – Good Q2 results also a key factor

While the US elections are providing a kicker, more fundamental factors are driving the Indian stock markets.

A key factor aiding the markets was the decision of the US Federal Reserve to leave interest rates to near zero, while reiterating their stand to do whatever it can to sustain an economic recovery in the US. Low interest rates, as we discussed in an earlier article, typically drive stock market growth.

But beyond interest rates, the major factor has been the Q2 results posted by several companies, many of whom have beaten street expectations. This, combined with an improving macro-economic scenario, is also providing support to the rally.

The reaction to the US Presidential election result is, at best, a short-term one. In the end, the fundamentals matter. It is important especially in a rally such as the current one to pick stocks wisely and research the companies that you may want to buy into.


Sources

R. Kalyanaraman
by R. Kalyanaraman

Chief Executive Officer

I am a sales guy at heart with utmost willingness to listen to people – customers, employees, competitors et al. Nothing gets me a bigger adrenaline rush than an interesting conversation with my customer!