Impact of the US Presidential elections 2020 on the Global Economy — III
India can not ignore the US as its top-three of its trading partner in many sectors. In this finale of the three-part article I share my views on how the 2020 US elections, the Presidency of Joe Biden and the “America IS Back” are going to affect, shape and push the global economy.
To get complete insights, read parts one & two here and here.
US Election Impact on Global Financial Markets
The global financial markets were touching new highs in the beginning of 2020, before tanking due to coronavirus caused lockdowns were applied. Since then, the liquidity glut has more than made up for your concerns that were true.
Extraordinary measures are needed in extraordinary times, and in 2020 the capital markets delivered on that count everywhere.
Debt & Bonds
In 2020, the global bond markets bought securities worth USD 8 trillion from governments, their agencies, and corporate issuers.
Stocks & Equity
The stock markets love a democratic house or in this case the Biden presidency. Between the election day and the inauguration day, the stock markets gave returns in excess of 14.3%, according to Karen Ho of Qaurtz (qz.com).
Ho cites data from S&P Global and CFRA research to check the hypothesis, that in the past 70-years no election year saw such gains.
As corporate investors seek to smoothen out the volatility and uncertainty, Refinitiv data showed 126 SPAC (special purpose asset/acquisition companies) IPOs raised $44B in the first nine months of 2020, 3-times more than the amount raised corresponding period in 2019.
The Secular growth sectors included the companies with the potential to benefit from long-term trends — such as healthcare, IT, and eCommerce.
The Cyclical stocks includes industrial, energy, commodity and financial stocks would lag the markets for several years up to Q2 2020. But as the cycle turns, these sectors saw more interest from investors and valuations inching towards long-term averages.
The mid and small-cap stocks will benefit most in an improving economy with many gains going their way. Unlike 2020, where only a handful of blue-chip companies were driving the market, now many mid and small cap companies want to share the limelight.
Overheating of the Economy
In November 2020, according to Jim Rogers (who had co-founded the Quantum Fund with George Soros), Chairman at Roger Holdings and Beeland Interests, the US government debt and the unprecedented liquidity injection by the Fed are the biggest risks for the year 2021 and ahead.
He is of the view that the administration and the Fed do not have any alternative to liquidity support and expanding the national debt, but its implications for markets and economy be a cause for worry. The easy money will cause the markets to expand the bubble to unprecedented levels, and when it will burst, it will be the worst burst of our lifetimes.
As the expansionist policies are adopted by every central banks and governments, the rally would last much longer, followed by a major correction. The governments will intervene again as they will not want to be seen doing nothing.
Inequality
The excess liquidity always finds its way to the top of the pyramid as the bankers and corporates have easy access to large swathes of money on offer at near zero interest. The poor will still find it difficult to finance their homes or business. The inequality will expand not only between the developed and the developing countries, but also between the haves and have nots in the developed world.
US elections Impact on Gold & Silver
Earlier just after Joe Biden and Kamala Harris won the US presidential elections, Gold and silver futures traded with gains as the dollar softened. According to Adrian Ash on BullionVault.com’s Gold News, as the bullion and financial markets do not see Biden’s $1.9 trillion stimulus not enough, you will see gold prices slip in accordance with commodities and interest rates.
Jim Rogers, having a diversified portfolio, owns both gold and silver, but he is not buying either of them anymore at highs. He says there will be correction and when this correction continues for long, he may buy more gold and silver. According to him silver is much cheaper than gold with a better margin of safety.
US Presidential Elections Impact on India
Jagadish Shettigar and Pooja Misra of BIMTECH write in Live Mint, that most people expect a return to the Obama era where the US plays more active role in world affairs. But it is not so simple and easy. The US-India relations are based on seeing each other as “key strategic partners.” With China a prime concern for all US allies in the Indo-Pacific region, India, Australia, and Japan can work with Biden to further boost relations.
Key Areas to Watch
Indian government is closely watching the key areas of software exports, immigration and H1 category visa policy, bilateral trade, and strategic ties with the Biden Administration. Under Trump, the US regularly pressurized India on its agriculture subsidies and to open its food markets for the world.
Immigration & Work Visas
As per an Economics Times report by Poorvi Chothani, for many Indian engineers and professionals, the USA remains their dream destination. The Trump administration created several roadblocks for them to immigrate to the US and work there. According to the Ministry of External Affairs, Government of India, year 2019 saw the highest rejection rates recently, except in 2020 due to COVID restrictions, jumping three times in 2019 compared to 2015.
The entrenched support of the Indian American community to the Democrats and his own public statements, Joe Biden may remove some of the restrictions and may even increase the H1B quota for Indians. This may also mean a faster pathway to citizenship for close to half-a-million Indians living in the US.
Bilateral Trade
In an interview to the Financial Express, Dr. Bappaditya Mukherjee thinks that Biden will not reject any multi-lateral or bi-lateral trade deal. In fact, the Biden administration may work actively to restore the WTO reputation back.
Vinay Shukla writes in Valdai Club, that Trump used to mock India as “tariff king” and the GSP (Generalised System of Preferences) privileges in trade to it available only to a developing country. This caused export losses to the tune of billions of dollars. It was done to “punish” India for running a trade surplus of merely $17.42 billion, compared to China’s $345.2 billion.
According to the Live Mint report cited earlier, bilateral trade was at $88.75 billion in 2019–20. The US was India’s largest goods export market at 17% share in 2019. If Biden revives the TPP, that Donald trump killed, the textiles exports from India will suffer.
FDI
Shettigar & Misra point out that in Q2-Q3 2020, US was one of the largest national importance FDI source for India. Because there is liquidity glut, it does not necessarily mean that it will find its way to Indian markets. But some of it will still find it lucrative With China being blamed for the coronavirus, it is a likely scenario that many of the US manufacturers will shift outside of China and, and India could be a likely choice.
Rupee vs Dollar
Surbhi Jain writes in the Financial Express, in the recent surge in the price of the Rupee against the Dollar was due to massive fund flows into India.
A report by Fitch, expects the rupee to trade only slightly weaker over the near term. The prices of many commodities have started inching up, including the oil prices, any more monetary easing will be offset by US dollar weakening here. Over the longer term, the over-valuation in Rupee vis-à-vis the Dollar will weaken the rupee.
Indian Secondary Markets
Kshitij Anand writes in MoneyControl.com, that with easy money flowing all around, the bulls will continue to have great time, as Biden’s presidency is considered over all positive for Indian markets. Kunj Bansal of Karvy Capital says with Democrats holding the troika of the US executive and legislature, the uncertainty in the US seems.
With RBI’s accommodative stance and low-interest rates that are going to continue for some time, equity is expected to remain the best asset class.
Sandeep Singh and George Mathew caution investors in their piece in the Indian Express. They say that events in the US could boost Indian markets, it will be easy money that could go as easily as it comes within minutes.
A Balasubramanian, MD & CEO, Aditya Birla Sun Life Mutual Fund in a report in Indian Express says India’s growth has the highest catch-up potential, with too much room for revival.
Strategic Ties
Dr. Bappaditya Mukherjee reminds, that the US designated India as its “major defense partner” in 2016 when Joe Biden was the Vice-President. This allowed India to receive license-free access to dual-use American technologies. One thorn in the flesh, writes Vinay Shukla, for Washington would be New Delhi’s ongoing defence partnership with Moscow. Obama-Biden administration slapped Russia with crippling sanctions due to their role in Syria and Ukraine.
While Russia stays India’s biggest supplier of arms and strategic assets like nuclear-powered submarines, India has so far, been able to balance both sides by buying military hardware from the US.
Conclusions
The election of Kamala Harris, and Indian origin Vice President, more than twenty key positions to other Indian origin US citizens, and joe Biden’s personal ties with India will make it easier for the Indian delegation to navigate the new administration.
Overall, the Biden administration policies will have a positive and growth impact on Indian financial markets. It is hoped that India will get less drubbing in international forums like it did when Trump was the President. The Biden-Harris team will take US-India ties to new heights of shared values, mutual trust, interests, and benefits.