It was a triple treat for the Republican Party in the US. Donald Trump thumped Hilary Clinton to emerge clearly victorious in the US presidential elections. In addition, the Republican Party also secured a majority in the US Senate as well as the US House. Trump’s win was greeted with a mix of scepticism, hesitation and surprise by the world markets. The Mexican peso crashed as did the US dollar. Bond markets took a tumble even as equity markets across the US and Europe corrected sharply. The Nikkei was down by over 5.5% in a single day, its worst performance in recent memory. The Nifty, however, rallied sharply after touching a low of 8067 in early trades and gained over 4% from its intraday low. That brings us to the key question; what are the key takeaways from the Trump victory?
We believe there are 10 key takeaways from the Trump victory…
- Donald Trump will take the lead in cutting corporate and individual taxes in the US. That has been one of his key election promises and he is most likely to stand by it. It is estimated that corporate tax rates may be cut from a high of 35% to 15%. Individual rates could also be cut sharply.
- The cut in corporate and individual taxes will have two important implications for the world economy. Firstly, the lower corporate tax rates may induce many American companies who are based out of low tax havens like Ireland and Netherlands to choose to come back to the US. Secondly, lower individual tax rates may trigger a virtuous cycle of higher spending and higher consumption demand.
- The Trump approach will also have serious implications for Trade policy and for global diplomacy. On the trade policy front, Trump proposes to scrap the NAFTA and also to impose 45% duties on Chinese imports. While the scrapping of NAFTA may open the Canadian and US markets to India, the China duties may not matter much to India. The US runs an annual trade deficit of $375 billion with China and India’s trade with the US is a small fraction of that.
- It is in the area of global diplomacy that Trump may have larger implications. He proposes to lift all nuclear restrictions on countries like Iran, Japan and South Korea. The US will also cut down its role of super-cop to the world for which the US is incurring a huge cost. Trump proposes a policy that is more inward looking and US centred. Additionally, Trump may not be too keen to finance the war in the Middle East and will prefer to engage more fruitfully with Vladimir Putin of Russia.
- Immigration curbs could be a big worry for the whole world. The US has grown on the strength of immigrants for all these years. To begin with, Trump proposes to deport all illegal immigrants. This number could run into millions. Additionally, he wants to make life difficult for Indian IT companies by making the conditions and cost of a US visa prohibitive. Trump also proposes to hike the minimum wage payable to immigrant workers to make it uneconomical for US businesses to hire immigrant workers.
- The salutary impact of Trump’s policy may be visible on the pharma sector. Unlike Hilary Clinton, who had promised to come down heavily on formulations and generic drug makers for price collusion, Trump will prefer to leave them alone. That will be positive for pharma companies which partially explains why pharma stocks were the big gainers after the Trump victory. There is the fear that Trump may choose to scrap Obamacare altogether, but considering its penetration it is doubtful if Trump will undertake something like that. Overall, Indian pharma companies may have a lot to celebrate.
- One of the themes of the Trump campaign was heavy investment in infrastructure. Over the last 7 decades, US infrastructure had become creaking and outdated. That called for a huge investment in terms of upgrading the infrastructure across the US. That may open up huge opportunities for Indian companies.
- Trump may have long term implications for the economics of global oil. He plans to give a big push to US shale and also plans to flood global markets with US oil. If Trump has his way then oil prices may look towards a new normal; and that normal will be much lower. That will be a great boon for net importers like India as the wealth transfer from oil producers to oil consumers will continue in the years to come.
- Like a true-blue republican, Trump may actually favour a more dovish monetary policy. Although, Trump has been critical of the Fed for being too slow on rate hikes, he may veer towards a more dovish monetary policy. For India, that will mean lesser monetary divergence risks and more chances of the RBI pursuing further repo rate cuts.
- Last, but not the least, for Indian markets it will be the end of uncertainty. Over the last few weeks, there has been a surfeit of analysis on the likely outcome of the US elections. At the end of the day, the real story for the Indian markets is domestic; aided by a strong consumption story and improving macro fundamentals.