You must be wondering, how can US elections impact the Indian stock market? Well, it is a valid question to ask. In this article, we will try to answer the question and talk about the possible impact of US elections on Indian stock market.
There are several factors that impact the stock market. The stock market is driven by the political climate of the country, financial policies, exchange rates, sentiments, etc. The US presidential elections are less than 3 weeks away and the global market has started seeing a rise in volatility. The Indian stock market is no different, as the date of elections is coming near, the analysts in India have started guessing the market impact.
Why do US elections have an impact?
The political events have a substantial effect on economic performance and new economic policies of the country and when the country is the most powerful in the world, the election impacts are seen in other nations as well. Even though the US population is only 5% of the total world population, the nation generates 20% of the world's income.
Both presidential candidates have different views on different nations, different approaches towards trading policies, etc. Since there is always uncertainty as to who will win the election, a lot of the world markets will see volatility as the date of the election comes close.
Let us understand this better - Bilateral trade between India and the US stood at an $88.75 billion during FY19-20. The US and China also have huge bilateral trade numbers ($659 billion in 2018). In the current election, you know Trump is not too keen on doing business with China, in case he wins, a lot of import/export business will come to India and Indian companies will benefit and hence the market will benefit. However, in case Biden wins, the US may continue doing business with China and it will impact the Indian companies that compete with China in trade.
Many other similar factors make US elections very important for developing countries like India.
The history - Relation between Sensex and US elections
Knowing how the Indian market has reacted to US elections in the past, gives us the opportunity to predict the outcome of the current election. As per the data available, out of the last five occasions, in four cases, Sensex has gained between 3% and 14% in six months after the US elections outcome
Let us analyze the movement of the Sensex and S&P 500 index between 1992 and 2012. If you study movement of both markets, one week post elections, you will notice a positive correlation of 0.97, meaning both markets moved in the same direction with higher probability. However, if you study the movement, post one month of election, the correlation reduces to 0.56, meaning sometimes they go in the same direction, sometimes they don’t.
It is important to know, the past data is never the guarantee of future results.
The current scenario & impact in coming weeks
When you look at the Indian stock market in the last week or so, you will see it is on the rise continuously. The Indian market, as of now, is indifferent to US elections. However, as the day of the election comes near, there will be uncertainty in the market. The market will become speculative and some specific sectors may start seeing volatility. Investors should be cautious in investing at this time. New and inexperienced investors should wait and watch.
Trump's victory may result in short term volatility in the Indian stock market. There could be a possibility that investors would invest in the US market only because the Trump government will restrict International trade to help domestic industries. In this case investors may not consider emerging markets for investment and that would impact the Indian bonds. When India receives foreign investment in Indian bonds, it is all denominated in rupees and hence with more foreign investment, rupees become stronger. In the above case, foreign investment will stop which will strengthen the US dollar on the increased inflow in US assets, leading to a sharp depreciation of the Rupee. However, this is expected to be a temporary or a knee-jerk reaction as the sharp fall in the market would provide an investment opportunity to long-term investors.
Once the election euphoria is over, global investors will start looking at the fundamentals of Indian companies once again. So, markets may move up after elections no matter what the outcome is. In case of a clear winner, the market will become stable in no time. However, if there is a dispute or no clear winner and the matter languishes for a month, there will be even more volatility.