Nov 9, 2016
Snapshot
Short term ramifications exist from these dual events, though in the longer term, positive structural changes are underway in the domestic economy.
The underlying fundamentals of the Indian economy remain strong particularly in quality long term growth assets.
No one expected Mr. Trump to win. We believe Mr. Trump will move to calm markets, and move closer to center. Further we would remind our readers that a Republican victory is normally great news for markets. With Mr. Trump’s proposed tax plan, we believe this trend appears set to continue.
Events
India: Indian Prime Minister Modi announced on the night of 8-Nov-16 the demonetisation of Indian Rupee notes of Rs. 500 and Rs. 1000 denominations.
To allow the banking system to cope with the “stress”, banks and ATMs would be closed on 9-Nov-16. Till 30-Dec-16, these notes could be deposited back with banks and post offices along with ID. Post this for a period of 3 months, above denominations can be deposited at certain designated RBI offices along with declaration.
U.S.: Donald Trump appears to have emerged as the President of the U.S., a victory for the Republicans.
Implications of domestic demonetisation
Broadly, this is in-line with the current Government’s focus on curbing corruptions and fake money circulation. While this would potentially lead to near term pain in the form of a currently unknown impact to short term earnings, this is a strong step forward in the right direction for long term alignment with the “ease of doing business” agenda, curbing black money transactions and curbing terrorist capital movement.
Boost to the Government coffers: This move coupled with GST are strong steps forward that will help Government finances in the long run and strengthen the fiscal position as well as domestic fundamentals.
Asset class implications:
Indian Bonds in a flight to safety would continue to benefit and we expect prices to remain elevated.
Gold as a commodity has seen re-rating as a safe haven
Potential negative impact for sectors:
In effect, business domains with exposure to unaccounted wealth should be avoided. Sectors like real estate and jewellery should be steered clear off.
High working capital companies such as FMCG involved in cash transactions should be temporarily impacted.
Along the same lines, domestic infrastructure companies dealing involved in cash transactions would need to be treated with caution.
Potential positive impact for sectors:
Likely improvement in CASA ratios of banks from part of the potential $200bn deposits. However, within banks, institutions with higher LAP (Loan Against Property) exposure should be avoided.
We remain committed to sectors with strong domestic headwinds, particularly Autos, Financials as well as select sectors within Energy and Materials.
Implications for Donald Trump coming to power
Similarities with Brexit i.e. short term pain, with recovery in the long run: While the results of the U.S. elections were against the popular polls suggested by media (in-line with Brexit), what is probably more surprising is the fact that Trump was able to garner majority in most of the Southern States like Florida, notwithstanding the shared border with Mexico. This echoes the similar support received for Brexit from England, Wales and the Southern Lands where supposedly the majority of the “business” centres are located which ideally should have voted for a “Stay”. As with Brexit, Indian markets had exhibited a knee-jerk reaction on the day (-2% to -3% down), but had recovered to pre-Brexit levels within a week.
Likely positive impact on markets: Highlighting our previous stance, in almost every case back to 1880, equity markets in the U.S. have risen on news that Republicans win elections and fall when Democrats win. This time around as well, a Republican win is likely to lead to massive tax cuts (promise to reduce the U.S. corporate tax rate from 35% to 15%), and markets love lower taxes.
Potential negative impact for Indian IT
The IT sector could get negatively impacted, especially in the short term. Trump recently hawkishly said his government would stop jobs from leaving America. Trump accused IBM of laying off 500 workers in Minneapolis and shifting their jobs to India and other countries as he warned of levying a 35% tax on companies doing so if he is elected. However, we do not expect significant impact in the long term as the cost advantage of emerging nations like India should outweigh going forward.
Potential positive impact for Export-oriented sectors
Export sectors such as Textiles, Auto Ancillaries and in particular, Indian specialty chemical companies could stand to further gain from Trump’s view of China as a potential adversary. With China already scaling down supplies of chemicals for various end purposes ranging from pharma drug APIs to fertiliser, Indian specialty chemical companies are already witnessing interest and this stands to further gain likely impetus.