Trump Tantrum!

Traits of tantrums are very simple. They move money out of EMs (Emerging Markets), put EM currencies on run, take the treasury yield high ( US 10 year) and galvanize the dollar index. Way back in 2013, when Fed hinted at turning off  its QE (Quantitative Easing) programs ( or rather tapering it off), tantrum with above traits followed which later was euphonically called Taper Tantrums. Now emerging markets are under similar tantrum attack post Trump election on hopes of huge fiscal spending back in US i.e Trumpflation. The impact can be seen in the rise of dollar index ( crossed 101) and in the surge of US 10 year yield. EM currencies are under pressure resulting in FPI outflows from both debt and equity markets. Indian markets, being part of EM basket, has come under this attack. Over $5Bn has flowed out from FPI kitty from Indian markets ( equities and bonds) since US election outcome.

What has made it worse for Indian markets is the timing of demonetization. It came at a time when markets were about to get the tantrum attack. In that sense, it became a double whammy for the Indian markets. Normally, in such sharp corrections, dual factors come into play. One is the price damage and the other one is time correction. Price damage usually happens quickly while the time correction, as the name indicates, lasts a while. More so, when the short-term impact is negative for most of the sectors from demonetization. Time correction does turn at some point, though “when” is difficult to predict. Given this, savvy investors use time corrections to put money to work without trying to time the turn. From this perspective, the ongoing correction is a brilliant opportunity for investors who had missed out the rally to start investing for long-term.

While one may debate the short-term impacts of demonetization on GDP growth, long-term positives are rarely questioned, esp. if the Govt. takes this initiative to a logical conclusion with more curbs on benami property and gold hoardings. These measures have the potential to put the economy into a higher growth orbit structurally in the medium to long-term ( Ref our post titled “The Coming Shift”). Ongoing correction, in that sense, is a golden opportunity for long-term investors.


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