Transcript of Podcast:
Hi I am Arjun Parthasarathy speaking and this podcast is on “Why Markets Love Trump & Modi”
Financial markets have embraced US President Donald Trump and Indian Prime Minister Narendra Modi. Dow, S&P 500, & Nasdaq Composite are at record highs while the USD is strong, Sensex & Nifty are at record highs and the INR is trading at 20 months high against the USD.
Why have financial markets given a Thumbs Up to Trump and Modi? Trump has been a wall street critic while Modi’s demonetization move has hurt the economy, yet markets are showing a distinct bullish flavour on the two political leaders.
Coming to Modi first, markets like political stability and with India largely seeing a coalition government in most of the 1990 and 2000 decades, the prospects of a strong government at the centre has gone down well with the markets. Modi’s party showing in recent state elections and municipal elections is giving strong signals to the market that the government will retain power in the 2019 general elections, which gives the government 5 more years to carry out its economic agenda.
Modi government is showing a friendly face to the markets, with less populist agenda, pursuit of difficult to implement reforms like GST, anti corruption stance, digitization thrust and spending on roads and infrastructure. Markets are inherently forward looking and views the government policies as economic growth friendly. Hence markets are giving growth valuations to assets.
US markets are liking Trump for his leanings towards lower taxes to enable companies to bring back billions of USD parked outside the country, infrastructure spending, less regulations and his appointments of wall street insiders to key finance and treasury positions. Trump has also toned down rhetoric on trade war with China and other trading partners, which is going down well with markets. Even though Trump has not implemented any market friendly policies to date, markets are optimistic that he will try and push his agenda through.
Market strength to a large extent depends on current state of the economy and corporate earnings. US economy is showing strength prompting the Fed to start hiking rates to normalize policy. Corporate earnings too have been keeping pace with higher expectations. India too is seeing the economy come out of demonetization effects and growth outlook is positive. Corporate results have been as expected with no major negative surprises.
Market friendly government’s with strengthening economy and good corporate earnings is a combination that provides a strong boost to sentiments. Positive sentiments lead to strong markets and markets can go from strength to strength even after reaching record high levels. The risk of course is both the governments and corporates not delivering to expectations, and this risk is what you need to watch out for.
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