Volatility in the domestic stock market may increase if the next US President Donald Trump escalates trade tensions from bilateral to multilateral, as it may hit global trade and economic growth, while pushing prices higher globally. Any attempt to raise fiscal deficit via tax cuts or spending boost could send US bond yields and dollar higher, Nuvama said while noting that the earnings momentum in India is also slowing and valuations are quite elevated.
The brokerage said it is maintaining a defensive bias for now, with private banks being the only key cyclical overweight in its model portfolio.
Nuvama noted that stock markets were quite buoyant in the first year of Trump’s tenure in 2017, but it was backed by upbeat global growth, earnings and reasonable valuations. "But tax cuts in 2018 reversed the rally with mid caps correcting 20–30 per cent. IT was the best performing sector in 2018, benefitting from increased spending by US corporates and rupee depreciation," it noted.
Today, domestic stock valuations are quite elevated and the earnings momentum is weakening. A rise in bond yields or weakness in global trade would only increase volatility in markets, it said.
Two areas of policymaking need close monitoring—trade policy and fiscal policy. On the trade front, Trump may decide to go multilateral in the tariff war. S far, the focus was on China. This is because despite various tariff hikes on China since 2018, there is hardly any improvement in US manufacturing or US trade deficit.
"Hence, Trump may get more aggressive on trade front by going multilateral. Meanwhile, on the domestic front, he may go for tax cuts or even spending boost to support the economy, pushing fiscal deficit higher, something that happened in his first term too. This shall create its own challenges as US sovereign debt is much higher today than in 2018," Nuvama said.
As far as fiscal policy is concerned, if Trump goes for tax cuts or spending boost, it could send bond yields higher. This in turn could potentially delay RBI’s rate cuts too. In all, if Trump chooses to get aggressive on trade and fiscal policies, it may exert a macroeconomic squeeze on the global economy–higher prices and slower growth.
"We maintain a defensive bias with private banks being the only key cyclical overweight in our model portfolio.