Trumponomics and its impact on Indian Stock Market
The Economic Scenario:
Donald Trump came to power on his agenda of Make America Great Again (MAGA) and promised strong actions to achieve the same. Post his inauguration on Jan 20, 2025, He has lived up to his manifesto and announced a series of extreme steps, not only on Illegal immigration but especially on the Economic front.
First among these were sanctions on Canada and Mexico, followed by some on China. However, an interesting aspect has been his willingness to reverse some of these and/or hold back their implementation as these countries either appeased or announced counter tariffs. So, there is some doubt in analysts' mind as to whether the tariffs are going to be really implemented or just used as a threat to negotiate better trade terms!!
Coming to India, he did not immediately announce any specific action against us and in fact Prime Minister Modi was among the earliest important international leaders to visit America. This may have been partly due to the conciliatory gestures made by India to the new American scenario. We announced some reductions in import duties on items we import from USA (Harley Davidson bikes for example) and our energy minister also expressed our willingness to buy Oil & Gas from America. The visit was also considered a success as both countries agreed on a goal to double our mutual trade to USD 500 Billion. Trump also said that he would look to export high end defense equipment to India (including the modern F-35 planes). We also willingly accepted the return of the Indian illegal immigrants.
However, one shock was his assertion that America would apply reciprocal tariff on any country that was applying tariffs on them! He gave time to the US trade authorities to investigate the same and said that they would become effective from April onwards. The implications of this on Indian companies and our exports naturally becomes an open and uncertain situation.
The Stock Market Scenario
The Indian Stock Markets have been on a severe correction since September 2024 with the Nifty 50 down 9%, the Nifty Midcap 100 down around 15% and the Nifty Small cap 100 down around 19%!
How much of this can be attributed to the Trump Effect and how much to other factors? And what is the outlook for the markets?
As mentioned above, the correction had started well before the result of the American elections was known! And the single biggest factor has been the selling by the Foreign Institutional Investors – the FIIs. FII holding in India has come down from Rs 75.54 lakh crores as on Aug 31, 2024, to Rs 67.76 lakh crores on Jan 31, 2025 – a drop of Rs 7.78 lakh crores!! Why have they pulled out so much from our stock markets?
This can be split into many distinct phases (some of which are overlapping)
A. High Valuations: Nifty was trading at very high valuation compared to our historic averages and in relation to other emerging markets. This implied a strong increase was anticipated in India's future GDP growth and consequently in the EPS growth of Indian stock market companies.
But the Quarterly earnings of the Jul-Sep quarter were very disappointing and did not live up to the expectations that the High PE ratio was predicting! The slowdown was later confirmed by quarterly GDP numbers which came down to 5.4% from an expected 6.6%. The reason for this was a slowdown in the government capex spending due to the Lok Sabha elections. This kickstarted the profit booking by the FIIs.
B. China announced a series of stimulus measures to pull their economy out of a slowdown and in anticipation of a revival many FIIs switched their investments to the relatively undervalued Chinese Stock Market.
C. Then came the US election results and with Trump's MAGA promise there was rising expectation that US economy would bounce bank strongly and with Trump's corporate friendly taxation policies – the US stock market listed companies' EPS growth was expected to rise sharply. So many FIIs felt it better to invest in US stock market by redeeming from emerging markets.
Further, with US inflation still not coming down to the comfort level of Federal Reserve, the chance of a rate cut diminished and hence the interest rate of the US 10 yr Treasury bond rose to 4.5% p.a. Many other FIIs then also chose to invest in the US Debt markets as it was a safer option with such high yields without default risk and without currency depreciation risk!!
The flight of dollars back to the USA combined with the high interest rates naturally led to a strengthening of the US dollar. The dollar index rose above the level of 110 (versus the rest of the world currencies). This made it very risky for FIIs to invest in emerging markets as any currency depreciation against the USD would eat away gains from those markets – naturally Indian markets also suffered redemptions due to this effect.
D. From the middle of January, the domestic earnings for the Oct-Dec quarter started coming out and while they were sequentially (Q-O-Q) better, they were still not up to market consensus expectations. Hence the FII selling only increased further because of this.
E. However, all this selling by the FIIs should have led to a much stronger correction in the Large Cap space (where most FIIs invest). But the correction was only 9%! Why?
F. That is where we must turn our attention to the actions of the domestic participants esp. Domestic Institutional Investors -the DIIs. Through all this period, ever since COVID came and went, since April 2021 investors' money has been flowing into the stock market as the number of dmat accounts sharply rose to 12 cr and MF investor base widened to 5 cr unique PANs. The MF SIP book expanded from Rs 10,000 crores to 26,000 crores per month.
The buying support by the DIIs and retail had naturally also partly contributed to our markets' high valuations in August. But when the FIIs started selling – the DIIs initially started buying the Large Cap stocks that the FIIs were selling. But the inflows that MFs received were spread across Large, Diversified, Mid and Small cap schemes. Hence the entire quantum of inflows was not eligible to purchase all the large cap stocks that the FIIs were selling. Hence there was a correction in the large cap stock prices.
Over time the slowdown in the economy made the DIIs to revise their expectations of future EPS growth for the entire stock market. So, DIIs also started booking profits in many mid and small cap stocks and increased their cash balances (Average MF equity scheme cash balances appear to have gone up from 3% of AUM to about 5% now - amounting to about 200,000 crores!).
This selling of mid and smaller cap stocks led to a much sharper fall in the midcap and small cap indices as the Free Float Ownership of small and midcaps is much less than that of large caps – so even a smaller amount of money moving out caused a much deeper stock price correction!
Hence, we have the scenario of Large: Mid: Small cap corrections of 9%: 15%:19%!
What is the way forward and when will this correction end?
Firstly, there must be clarity on the international front – Will Trump implement his Tariffs and Reciprocal Tariffs rigidly or will he use it as a negotiating tactic?
Secondly can India handle this issue in a smart manner and benefit from the scenario through better negotiation and leverage the China +1 opportunity?
Thirdly will Government resume its Capital Expenditure program and when will the Rs 100,000 crore tax benefits come through to the economy as increased consumption/savings and reflect in companies' earnings guidance??
It is likely that clarity around all of these will completely emerge only from April 2025 onwards.
But the good news is that Nifty 50 PE has finally corrected down and is below the 5-year long term average. So, from a valuation perspective we are closer to a recovery compared to a few months ago!
Fingers Crossed and Let's Hope for the Best
Sunil Subramaniam
Founder & CEO
Sense and Simplicity
