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Big Story | Trump or Biden: Who’ll bring cheer to the stock markets?

Lokeshwarri SK | Updated on October 31, 2020 Published on October 31, 2020

Trump is undoubtedly a cheerleader of the US stock market, but Biden promises stability and a coherent plan to lead the US out of the pandemic and recession

This week, the citizens of the United States of America will vote to elect their next President.

The entire world has been riveted on this event, since the next US President — whether it is the Republican Donald Trump or the Democratic party candidate Joe Biden — will play a large role in directing the future course of the global economy and the geopolitical environment.

Investors in equities will be interested in the outcome for markets, particularly as the Indian and US stock markets are currently at a very critical juncture.

 

The 38 per cent plunge in the Nifty 50 in March this year has been erased, with the index reaching just 2 per cent below its lifetime peak in mid-October. Stock prices are overvalued when seen against trailing earnings growth, and investors are using FY22 earnings to justify current prices.

The US market, led by technology stocks, has been on a similar dream run since the Covid-lows. Sustaining this rally hinges, to a large extent, on a strong leader in the US who will not only take the pandemic seriously and help contain it but also avoid further disruptions to global trade and international relations.

Biden seems a better choice from this perspective. But Trump’s pro-rich and pro-Wall Street policies have been largely instrumental in driving the US stock market rally over the last four years.

Trump’s tax policies: More benign

Over the last four years, Trump has hardly endeared himself to anyone, thanks to his brash ways. But no one can deny that behind the unsophisticated veneer is a very smart business man. Many of his policies have been blatantly pro-rich.

Immediately after stepping in to the Oval Office, he announced a Bill slashing corporate tax rate from 35 per cent to 21 per cent. He also announced across-the-board reduction in individual tax. The sops were expected to reduce tax revenue by $1.5 trillion over a decade, though experts have pointed out that over 80 per cent of the sops will benefit only the top 1 per cent income-earners. Large corporates have seen their earnings increase, thanks to this largesse.

Trump has promised that if he is re-elected, he will cut taxes and boost take-home pay, though he hasn’t gone into specifics.

He has also indicated that he will lower maximum capital gains tax to 15 per cent.

Joe Biden has not minced words in criticising Trump’s tax policies and intends to reverse a large part of Trump’s tax cuts in order to finance infrastructure and other spends.

Biden’s tax proposals include raising corporate tax rate to 28 per cent from the current 21 per cent, a minimum tax of 21 per cent on all foreign earnings and a minimum tax of 15 per cent on book income. It is, therefore, obvious that corporate earnings are going to shrink if Biden pushes through his proposals. The American wealthy will not be happy with Biden either, as he proposes increasing the top individual income tax rate back to 39.6 per cent, from the current 37 per cent.

Biden has promised that no one earning less than $400,000 per year will have to pay a single penny in extra taxes. That is, however, not likely to benefit any taxpayer or create investable surplus that can be ploughed in to equity markets.

Bottom-line: Trump’s tax proposals are better for companies. But Biden proposes to use the increased tax revenue towards infrastructure and public spends that can address unemployment and help growth, which will eventually help listed companies over the long term.

US investors veer towards Biden

In one of the Presidential debates, Trump had pointed towards Biden and said: “If he is elected, stocks market will crash.”

Initially, US analysts agreed with Trump and wanted him to win so that the lower tax regime could continue. Besides, Trump is the cheerleader of the US stock market and in most of his tweets and speeches, he has used stock indices as a measure of his success. This was elaborated in the BusinessLine article ‘Markets and the Trump-Modi effect’.

What’s more, Trump closely follows stock market indices and takes prompt actions in the event of a serious correction. For instance, the steepest fall in the S&P 500 since Trump took charge was between September 2018 and December 2018 when it lost around 17 per cent as the US Federal Reserve hiked rates aggressively and unwound securities purchased in the quantitative easing programmes.

Trump had then used his influence to make the Fed halt its interest-rate hikes in January 2019 and renew asset purchases, thus halting the correction. The massive stimulus package announced this year, amounting to 13.2 per cent of the US GDP, was partly due to the 32 per cent decline in the S&P 500 index in March this year.

However, many US stock analysts who were initially fearful about a Biden victory are now veering towards the view that a Biden victory may be better. This view is based on three factors. One, he takes the Covid-19 pandemic more seriously and will take more concrete measures to contain the pandemic. Two, the hopes of another large stimulus, of over $2 trillion, once he is elected, is also making investors turn favourable towards Biden.

Three, some experts are stating that Biden is likely to move slowly in raising taxes — and the benefits that are likely to accrue due to reduction in tension over immigration, global trade and China will mitigate the impact of higher taxes.

There is also a growing concern of late that Trump will not accept electoral defeat and prolong the uncertainty by contesting the result.

Bottom-line: A Trump victory can result in the continuation of the rally in US stocks. But it is difficult to see how far this liquidity-driven rally can continue. A Biden win can result in short-term volatility, but that may be healthier for the long term.

Biden better for Indian equities

Indian equity investors may also prefer Trump since he is more prone to take proactive measures to keep the rally in US stocks going. This will help the ongoing rally in Indian stocks that is largely fuelled by FPI (foreign portfolio investor) money.

Foreign investors have net purchased over ₹93,000 crore of Indian stocks in 2020-21, the highest since FY15.

The largest source of FPI flows into India is the US — investors from the US hold ₹10,86,876 crore of Indian stocks, accounting for 37 per cent of FPI holding of Indian stocks. A robust US stock market increases the wealth of the FPIs, leading to larger flows into India, helping Indian stocks.

While a Trump win may be good for the immediate future, a Biden tenure promises greater stability, which can lead to more sustained growth. Either way, Indian stocks are highly likely to mimic the movement of the US stock market in the period following the election due to the strong linkage between the two markets.

Correlation analysis of the MSCI India and the MSCI US indices (see table below: Strong linkage) shows that the correlation has become stronger since 2004, which means that the direction of the movement in both indices has been similar since then.

 

But the correlation was much weaker prior to 2000, when FPIs did not dominate the Indian market.

The returns of the MSCI India and the MSCI US around US Presidential elections have also been largely in sync (see subhead: In lockstep).

That said, Indian equities are particularly vulnerable now, with the Nifty 50 and the Sensex currently poised close to their January peaks. The results of the US elections can provide a reason for some profit-booking.

Bottom-line: Biden is better for sustained, long-term growth in Indian stocks as well. Trump’s election as the US President again can lead to excessive froth in stock prices that can cause a lot of pain, once the tide turns.

Offshoring work by American firms

Investors in Indian IT and pharma companies will be interested in the policy stance of the US Presidential candidate towards offshoring jobs. However, there may not be too much difference between Trump and Biden when it comes to creating jobs for Americans and reducing offshoring of jobs.

Trump won the 2016 election on an anti-immigration agenda and he is likely to continue this, if elected for a second term. In his election promises, Trump talks about “Made in America” tax credits, intends to prohibit American companies from replacing US citizens with lower-cost foreign workers, and wants new immigrants to be able to support themselves financially.

In the last few weeks, the Trump administration has been tightening the rules governing the H-1B programme further. Biden plans to impose a tax penalty on businesses that outsource work to other countries, thus shipping jobs overseas. But he has also promised to increase the number of visas for permanent, work-based immigration based on macroeconomic conditions.

Bottom-line: Indian IT and pharma companies have to brace themselves for some tough measures from either Trump or Biden as the next US President tries to create jobs for the millions of Americans who have lost their employment due to the pandemic.

Impact on foreign trade

Global trade has been in a turmoil through Trump’s regime. The renegotiations of trade treaties and the tariff war has hurt global supply chains, making international merchandise trade extremely sluggish over the last four years.

With the phase one of the US-China trade talks concluded in January and tariff imposed by the US rolled back on a few items and reduced on others, and China agreeing to import more from the US, there is unlikely to be further escalation of the trade war. But Trump intends to maintain pressure on China and has promised tax credits and expense deductions for companies that bring back manufacturing to the US. Importantly, there will be no federal contracts for companies which outsource to China.

Biden is also likely to adopt an equally tough stance against China on trade-related transgressions, but unlike Trump, he intends to use trading partners and multi-lateral organisations to make China toe the line. Under Biden, further disruptions are unlikely and companies are likely to benefit from a more stable policy regime.

Bottom-line: Further disruptions to global supply chains will be minimal if Biden comes to power.

Trump or Biden

While Trump promises short-term riches, Biden is a better bet to lead America out of the pandemic and the ongoing recession.

But markets are likely to accept either of the candidates, as was seen in November 2016. After an initial period of turmoil, it will be business as usual for markets.

In lockstep

We analysed the movement of the MSCI US, the MSCI India and the MSCI World indices around the US Presidential elections (see table below).

 

The takeaways are as follows:

a) The month following a US Presidential election is marked by volatility as markets factor in the pros and cons of the new regime.

b) But a year later, the policy moves of the President and other factors influencing markets take over.

For instance, though stock markets were shell-shocked when Donald Trump became the President in 2016, a year later, the MSCI US was up 21 per cent thanks to the large tax cuts initiated by him.

c) If we see the performance of the US market over the term of each elected President since 1996, it is clear that the economic cycle has a large part to play over the four-year time-frame. The MSCI US delivered the best return during Bill Clinton’s term (103 per cent), largely because the US economy was in an upswing in that period with falling unemployment rate.

Trump’s tenure saw the next highest return since 1996, at 65 per cent, and his term was also marked by steady growth and falling unemployment.

d) Both the MSCI India and the MSCI World moved in the same direction as the MSCI US over the medium and long terms. It needs to be noted that while the returns of the MSCI India a year after the election and over each US President’s term outpaced the MSCI US’ prior to 2008, the returns in India have tempered significantly since then. The slowdown in returns in the MSCI India is particularly stark during Trump’s term.

e) There isn’t too much of a difference in the stock market performance whether it is a Democrat or a Republican US President in office.

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Published on October 31, 2020
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