A global reset

The developed world must acknowledge certain truths

The past few days has given a lot to contemplate about world affairs. There are conflicting views on how the financial markets take the baton from here on as clearly the status quo has changed. The direction that most observers expected prior to the change in leadership at the White House was for lower interest rates continuing efforts to tame inflation and no major change in foreign policy especially regarding the geopolitical hot spots of Northern Europe and the Middle East. This meant an environment that was decently positive for bonds and a weaker US dollar was the consensus expectation.

This also meant that fiscal profligacy and continuing debt burdens in the US were an “open secret” that most were willing to ignore. However, with a dramatic change in direction at the White House, many of these assumptions will be tested in the coming months. Already, statements from the US president elect and key nominations for cabinet posts indicate a dramatic change in direction from the above status quo. Prior to the election, almost everyone agreed that no matter who came to power, it was a foregone conclusion that the fiscal deficit in the US would continue to rise. With aggressive tax cuts that the Trump election campaign espoused, this could be a double whammy leading to higher inflation and in turn higher interest rates, reversing the earlier expectation.

However, the elephant in the room is the ballooning US federal fiscal deficit. No matter what the policies are, higher interest rates will hurt the economy much more than usual. US Households have shed their surpluses post COVID and are back in indebted territory, the US government has increased its debt burden post the pandemic leading to a dramatic rise in GDP growth fueled by a large spending program leaving surpluses with the corporate sector. This is indeed worrying from a longer-term perspective if the US corporate balance sheets worsen from here or if there is another banking crisis. While this does not appear to be imminent at this time, it will indeed be a period of much uncertainty, much unlike the more predictable scenarios under the previous administration.

Foreign interest in India equities should be a logical choice

The India story built on the twin pillars of demographic leadership, pushing the highest number of employable age citizens in the next 10 years into the economy, and growth in infrastructure will be the bright spot in the world at large. However, from an investible universe perspective it still finds itself not an asset class by itself but depends on regional flows for FPI funds to allocate to India and our key expectation is that India assumes this status soon.