The Indian stock market has experienced a remarkable surge over the past four years, recovering from the depths of despair during the COVID-19 pandemic. The Nifty 50 closed at 8,598 at the end of March 2020, and no one could have predicted the extent of the rebound: a pandemic, the Russian invasion of Ukraine, Western sanctions, a slowdown in China and Europe, and even the loss of a parliamentary majority by India's ruling party—led by an extremely popular leader.
By the end of September 2024, the index had soared to 25,810, a threefold and more increase in just over four years. The Nifty Small Cap Index performed even better with a five-fold rise. All good things come to an end—or in the case of markets—come to a halt for a while.
Over the past six weeks, the Nifty 50 has dropped 9%, while the Small Cap Index fell 8%. Though experts downplay these declines, I am not so sure. This could mark the beginning of a sluggish phase or even a prolonged downturn. A variety of local and global factors will determine the direction, and many of them are beyond the Indian government's control. One key issue that needs to be watched is Donald Trump's sweeping victory in the US presidential election.
Trumponomics
On 6th November, it became clear that Donald Trump would return to the White House. Strangely, the Indian market rallied on that day, despite the fact that Trump's stated plans offer little benefit to India. However, once the reality of his return set in, the market began a six-day selloff. Foreign investors, who tend to have a better grasp of macroeconomic trends than Indian investors, have been selling Indian stocks for some time. Mr Trump's victory has only added fuel to the fire.
While world leaders, investors and diplomats wait to see what the unpredictable Trump will do, he has already made key appointments that align with his hard-edged ‘Make America Great Again’ (MAGA) agenda. Among his appointees is Elon Musk, who has been appointed to head the new department of government efficiency (DoGE).
The writing on the wall is clear. Mr Trump is in a tearing hurry to implement his campaign promises. It would be suicidal to assume that his promised actions would be tempered by realpolitik or get bogged down in the Washington ‘swamp’ or the ‘deep state’. Even if a part of Trumponomics is implemented, it will hit the rest of the world like a tidal wave from which no major economies will be spared.
Among Mr Trump's planned actions are imposing tariffs of up to 60% on products from China and 10% - 20% on those from the rest of the world. Any country that has a large trade surplus with America, is ‘cheating us’, he feels. So, Mr Trump and his advisers are keen to fix bilateral balances.
China runs the biggest trade surplus with the US, followed by Mexico and Vietnam. They will be hit the most, but India is well up there on the hit list too. It is 11th on the list of countries that have a trade surplus with the US, just below Korea, Taiwan and Italy.
Large tariffs on China and Mexico (which China also uses to direct exports to the US) seem certain. In response, China will cut its prices further and weaken its currency to protect its US exports. It will also redouble its efforts to capture more of the Global South, where it has been remarkably successful is pushing out Western countries over the past few years.
India has no strength to do any of this. We have a high-cost and inefficient manufacturing base with a weak rupee, something our muscular government has not been able to fix.
The next big problem for the world is a stronger dollar. Mr Trump is pushing hard to make American companies manufacture more in America, through deregulation, cutting environmental regulation and lowering energy costs. If he succeeds, the US will attract investments which will make the dollar stronger. From 27th September, the US dollar is up almost 6.5% and 3% since 5th November.
The inflationary impact of Mr Trump's policies, such as tariffs and deportation of immigrants which will make tight labour markets even tighter, will make the dollar stronger. Higher inflation will lead to higher interest rates, strengthening the dollar further. It could well be that the Trump team has a solution for this but we will have to wait and see how these basic economic forces can be tamed. A strong dollar makes imports more expensive and increases inflationary pressures for a country like India.
The timing could not have been worse. Troubles on the external front have come exactly at a time when large well-run domestic businesses are reporting a severe slowdown. Hindustan Unilever, Nestle, Asian Paints, Britannia, Tata Consumer, cement companies, passenger car companies, banking giants, diversified giants like ITC and Reliance, microfinance companies… are all struggling to grow.
Jefferies, a foreign brokerage firm, recently lowered FY24-25 earnings estimates for nearly two-thirds of Indian companies that it tracks, which have announced September quarter results; this is its steepest downgrade ratio since 2020. The reason? A cyclical slowdown in the economy.
And yet, many Indian companies continue to be valued as if they are going to report double-digit growth year after year. The market sold off on these concerns since the end of September. While it will go up when the selling pressure of foreign institutional investors (FIIs) reduces, it would be a mistake to assume all is well. Trumponomics, poor growth and high valuation certainly don't make for a bullish recipe for the Indian markets.
(This article first appeared in Business Standard newspaper)
Comments
but allegation of insider trading after so many ye
3 days ago
the problem is middle class who are the engine of indian economy hul,nestle even brirania indicating limited and gradually reducing power of their purchasing power question is any problem of big economy like china or usa or usa has cascading effect then resilience will be tasted.
With the Indian economy and markets, if you are too pessimistic, you will miss an opportunity; we saw this starting from the middle of 2022 until now, when growth has been strong across the board and stocks shot up in unison. However,...
What seemed like a one-off issue is starting to look like a trend. Collections from the goods and services tax (GST) fell to 6.5%, its lowest level in 40 months. At 6.5%, it barely tracked inflation which means there was no volume...
Many people seem convinced that the India is on track to our becoming a developed nation. The untrammelled bullish case is that we have shed the vulnerabilities that were obvious until 2014 when the Indian economic renaissance burst...
Fiercely independent and pro-consumer information on personal finance.
1-year online access to the magazine articles published during the subscription period.
Access is given for all articles published during the week (starting Monday) your subscription starts. For example, if you subscribe on Wednesday, you will have access to articles uploaded from Monday of that week.
This means access to other articles (outside the subscription period) are not included.
Articles outside the subscription period can be bought separately for a small price per article.
Fiercely independent and pro-consumer information on personal finance.
30-day online access to the magazine articles published during the subscription period.
Access is given for all articles published during the week (starting Monday) your subscription starts. For example, if you subscribe on Wednesday, you will have access to articles uploaded from Monday of that week.
This means access to other articles (outside the subscription period) are not included.
Articles outside the subscription period can be bought separately for a small price per article.
Fiercely independent and pro-consumer information on personal finance.
Complete access to Moneylife archives since inception ( till the date of your subscription )
