How will US midterms impact Indian equities, bond yields, crude oil?

Historically, US equities have performed strongly following midterm elections. The S&P 500 has gained an average of around 6 per cent over the subsequent 60 trading days, data shows.

The outcome of the US midterm elections in November could influence the near-term trajectory of global equity markets, with historical trends pointing to strong returns after the vote, analysts said. Gains, however, could be capped as bond yields and crude oil prices are likely to remain elevated.

 

Historical data, however, suggest that Indian markets have not consistently replicated the performance of US equities during the third year of a US presidential term.

 

An analysis of Indian market returns since 1998 — when foreign investors were allowed greater access to the domestic market, which had previously been relatively insulated from global developments — shows that Indian equities delivered an average return of 4 per cent over six months and 26 per cent over 12 months during the period examined. However, the performance was less consistent, with negative returns recorded on two occasions. 

 

The findings suggest that while a favourable global backdrop could support domestic equities, India's market performance will also depend on earnings growth, valuations and foreign capital flows.

 

Geopolitical implication

 

For India, the US midterms, according to analysts at Emkay Global, could have more significant geopolitical than direct market implications. Analysts at Emkay Global expect Democratic control of Congress to increase scrutiny of tariffs and immigration policies, although this may not materially ease existing trade and diplomatic frictions. 

 

 

The brokerage in an October 30 note coauthored by Madhavi Arora and Harshal Patel also flagged the possibility of a renewed escalation in the Iran conflict after the midterms, which could weigh on India's balance of payments (BoP), the rupee and domestic equity markets through higher energy prices and increased external-sector pressures.

 

Historically, US equities have performed strongly following midterm elections. The S&P 500 has gained an average of around 6 per cent over the subsequent 60 trading days, 12 per cent over 120 days and 17 per cent over 180 days, Emkay Global said. 

 

However, the brokerage cautioned against extrapolating these returns to the current cycle. “Equities have already captured a larger-than-usual share of the typical midterm rally, while elevated bond yields and oil prices leave markets more vulnerable to inflationary pressures and a potential slowdown in economic growth,” Arora and Patel wrote.

 

A gridlock situation

 

Jyotivardhan Jaipuria, founder of Valentis Advisors, said a split verdict in Congress could prove more favourable for equities than a Democratic sweep, as political gridlock could encourage a more balanced policy framework.

 

“The political gridlock keeps spending in check and is good for bonds,” Jaipuria said, but cautioned that rising bond yields globally pose the biggest risk to equity markets. 

 

For Indian markets, Jaipuria believes a recovery in corporate earnings and more reasonable valuations could provide support. But the sustainability of any rally will depend partly on global financial conditions, with rising bond yields and geopolitical risks remaining key threats to the outlook.