Equity markets around the world follow US market index to get overall trend of financial markets but this scenario could change now with Trump plans. It was expected that Trump victory would lead to downfall across markets but only Emerging Markets are leading the fall while US markets are touching almost life highs. Reason to this is almost found behind trump’s road map for their economy.
Key Points of “Trump”onomics:
- To slash the highest marginal income-tax rates, cut rates of tax on corporate income and on capital gains
- Completely abolish federal inheritance and gift taxes entirely
- To spur Infrastructure spending and Defense spending
Good or Bad for US ?
Trump victory was a surprising win in US markets but it did bring some cheer in Equity market which makes us think that it was what investors think would be good for corporate while common men may have some hiccups. Why it bought such a huge buying in US ? Answer was straight from Trump campaign highlight: “To slash the highest marginal income-tax rates, cut rates of tax on corporate income and on capital gains” . Corporate balance sheets and High networth individual spending power would getting stronger with tax cut and in this anticipation money started to flow from Corporate bonds to Equity markets. But on the other side it would widen inequality i.e., Richer would get more richer. So inflation could pick up in real estate segment which would be good for sometime but not for longer term
Completely abolish federal inheritance and gift taxes entirely was thought for common men. This would bring some relief on tax pain to individual who has received gifts and some properties in Inheritance. In all this is a good factor but some might use this is a tax evasion but the ratio would be negligible which is ok! Most crucial campaign point was Boosting infrastructure spending which bought much needed rally in steel prices after hitting multi year low last December. This would also cut down unemployment to large extent which could in all again help to boost inflation in country which they are starving since years. But the plan of $550bn approx spending could increase some burden on Government.
Summarizing overall picture of his plan i feel good days are ahead for US markets. Already stocks are zooming up which has increased bond yields meaning people are now having trust on corporate reversal. This would result in strong dollar which would bring back investment for Emerging markets to US markets. Even second thought could be that we may see early pause to on going bond buying programmed if we see uptick in inflation and rate hike! The biggest challenge to trump would be felt after few years which is Trade deficit. As dollar gets strong, domestic manufacturing would go up but that would also means that import is going to be more cheaper. This was a problem back in 2013 when we had felt same pinch of currency war. So Trump should keep a tight watch on trade deficit.
Technical View on Dollar index
Dollar index which measures dollars strength vs Other currencies is also in a rising trend and supporting my view stated above.
Above chart is a dollar index weekly chart and as we could notice at bottom that momentum is just catching up while on the charts it has given a 2 years consolidation breakout above 100 level last week. Secondly it also moved out up short term upside trending channel fueling in more support to strong dollar. Now we talk about support on the downside it would be 96 which is the blue 50 weekly average which is acting as strong support since late 2014.
Technical View on Dow Jones Index
Now lets look at the chart of Dow Jones to get Trump victory more clearer
As we all could see in attached weekly chart of Dow Jones, we have given a Double Bottom breakout with a confirmation neckline at 17950! Last week also confirmed breakout of a downside temporary correction by moving out of that channel which exactly took support at neckline making Double bottom target 20450 more rock solid.
So we could confirm from above that good time for US is ahead atleast for time being
Emerging markets in Trouble?
Fortune of Emerging markets seems to have changed overnight. Emerging markets were expecting Clinton to come in power and we could make at obvious reasons why from Trump road map. Two biggest negative factor for Emerging markets: Firstly; Strong dollar and rising rates in US would trigger a good sell-off in emerging markets. This seems to have already started as since the trump victory, emerging markets have seen outflows world $7bn from their equity. So for sure its going to be some trouble ahead in emerging stock market indexes. Secondly: Strong dollar would raise cost of exiting finance with emerging economy corporate have raised from outside their country. This would burden balance sheet which could add more trouble to companies. So in-short currently we should avoid emerging markets.
Technical view on MSCI Emerging market index
MSCI Emerging market index measures a pool of selected stocks from emerging markets and it has also followed the path stated above i.e., Sell-off.
So as we could notice in the weekly chart of MSCI Emerging market index above that it had given a inverse H&S breakout few weeks back as Clinton was expected but now it has proved to be false breakout and sell-off could be witnessed easily. Though one more close below neckline at 868 is required bit indicators have started weakening.
After analyzing US vs Emerging markets on Trump win, i could sum up that Emerging markets are going to have some tough times in near future while US markets could out perform. Surely, exports from Emerging markets are going to take a hit for few quarters but that wont be completely avoided by US corporates as still emerging markets enjoy Low Labour Cost. And emerging market governments such as India and Indonesia are taking strong steps to attract Foreign capital which could be fruitful for some sectors as they have Demographic opportunity.
But as of now we could expect Divergence between US and Emerging markets to widen as we could already mark in the graph below
To end up, divergence might widen for few weeks more but ultimately now its would be good time to pump in some money in emerging stock markets such as India, Turkey, Indonesia and Thailand where Domestic demographic demand would start inflating corporate profits soon.