More than poll result, EMs to track new White House’s stimulus signals

Mumbai: No matter who wins the US Presidential election on Tuesday, the direction of Indian equities like most other global peers will depend on the timing and size of the much-expected fiscal stimulus by the next government in Washington. The market, in need of further impetus after the blistering rebound of 55 per cent since March, will however be wary of the spike in coronavirus cases in the wake of the festive season, said emerging market watchers.

For financial markets, a Republican victory led by Donald Trump is comforting in terms of continuity of policies. But Joe Biden’s win, which would bring Democrats back in power in the world’s biggest economy, could also be celebrated if he manages to offer a bigger fiscal package that could push emerging markets higher.

“If Biden wins the election, the probability is also great that the Democrats will also win the Senate over from the Republicans. Then they could push through measures like raising taxes and more fiscal spending. The combination of that would bring down the dollar,” said Mark Matthews, head of Asia research, Bank Julius Baer. “A weaker dollar would be positive for emerging markets, including India.” A weaker dollar against the rupee would drive more flows into the emerging market equities.

“If there is a larger stimulus, it should result in a weaker dollar, which is positive for emerging markets, including India,” said Sanjeev Prasad, co-head, Kotak Institutional Equities.

The rally in emerging markets this year, including India, has been driven by the fresh doses of liquidity from global central banks and governments. Foreign portfolio investors (FPIs) have pumped in Rs 88,600 crore into Indian stocks since March 25, driving the Nifty from its four-year low of 7,511.1 on March 23 to 11,642.40 last Friday. The index is 6.8 per cent away from its all-time high of 12,430.5 hit in January this year.

“The rise in EM equities in general, and India in particular, remains very much a flow-driven one,” said Krishna Memani, US-based chief investment officer at Lafayette College. “Due to the liquidity and QE programmes of central banks, all boats have risen, including EMs. In addition, the weaker dollar trend, to some extent created by the same money-printing and lower interest rates is also helping Indian equities. For the most part, both of these drivers should remain in place irrespective of who wins the presidential elections.”

India is also expected to be a beneficiary of the ongoing tensions between the US and China. Biden as president would be keen on developing a personal relationship with Indian Prime Minister Narendra Modi as India is seen as a crucial ally of the US to counter the rise of China, said Singapore-based Matthews.

Better-than-expected corporate earnings trends and opening up of states are also giving comfort to investors though India is far from recovering from the blow dealt by the pandemic to its economy. Market watchers said it will be crucial for the country to keep the virus cases under check to ensure the revival is not impeded.

“We continue to monitor the healthcare situation closely. We are aware of the risk of a spike in cases after the Diwali festival,” said Gustavo Medeiros, London-based deputy head of research at Ashmore.

Last week, global markets were gripped by fresh concerns of a surge in coronavirus cases in Europe that led to fresh restrictions on people movement and business activity. Fund managers said the worries about the pandemic did not trigger a big selloff because of optimism about a vaccine.

“The markets are clearly assuming that we will have a vaccine at some point in 2021. If for some reason, that assumption is invalidated, all markets globally will be in big trouble,” said Memani.