Trump 2.0 Causes Volatility In Indian Markets - Know What Investors Should Do

As expected, Donald Trump’s return to the White House has caused volatility in Indian markets with key indices factoring in uncertainty over Trump’s new decisions. Trump was sworn in as the 47th President of the United States of America on Monday, January 20.

The markets closed in the red on January 20 with the benchmark Nifty 50 dropping 320.1 points or 1.37 per cent to close at 23,024.65. The 30 share Sensex also closed lower by 1,235.08 points or 1.6 per cent at 75,838.36. However the benchmark indices posted a marginal recovery on January 22 as the Sensex closed in the green at 76,404.99 levels up by 566.63 points or 0.75 per cent, and the Nifty50 also closed in the green at 23,155.35 up by 130.7 points or 0.57 per cent.

What Caused The Fall

Ravi Singh Senior Vice President, Retail Research at Religare Broking Ltd. told Outlook Money that the fall witnessed in the markets on January 20 was caused by heightened investor caution and uncertainty about Trump’s policies. He added that additional factors such as global economic concerns and the digestion of gains also contributed to the crash seen on Monday.

“Markets are falling post Trump's inauguration due to investor caution and uncertainty about his policies. Uncertainty, investor caution, digestion of gains, and global economic concerns are contributing factors. The market is taking a breather, consolidating gains, and reassessing positions,” Singh told Outlook Money.

Is More Volatility Expected

The India Volatility Index (India VIX) which is used to measure the market's expected volatility over the next 30 days fell to 16.77 levels, down by 1.7 per cent. Singh said that a decrease in VIX indicates less volatility. Notably, the index has gained 6.45 per cent since January 20, the date of Trump’s inauguration. Singh said that this increase indicates volatility in the upcoming days.

“When the VIX is decreasing, it can be inferred that the market is expected to be less volatile, with fewer extreme price movements. This can be a good sign for investors, as it may indicate a more stable market environment. However VIX has reversed from previous levels in the last 3 sessions which indicates upcoming volatility,” Singh said.

Is A Crash Likely To Follow The Volatility

In the two days following the appointment of Trump as President, Indian markets have seen volatility with the benchmark Nifty 50 index hitting an intraday low of 22,976.85 on January 21 and a high of 23,169.55 on January 22, indicating a movement of 192.7 points in just two sessions. Singh added that a spike in volatility is not a definite indicator of a crash but a ‘sustained increase’ in volatility can be a predictor of a potential market downturn.

“The spike in volatility may indicate increased uncertainty and anxiety in the market, but it's not necessarily a definitive predictor of a crash. Volatility can rise due to various reasons, including uncertainty, rebalancing, and technical factors. However, a sustained increase in volatility can be a warning sign of a potential market downturn. As there are major global changes that are affecting stock markets,” Singh said.

What Should Investors Do Amid Volatility

Singh advised that investors should closely watch the volatility indices. He also said that investors should consider not investing in ‘high-beta’ stocks and focus on shares of companies with sound financial health and good growth prospects. He also recommended that investors should diversify their portfolios across sectors and asset classes to navigate the volatility.

“Investors should monitor volatility indices, watch for other warning signs, and maintain a diversified portfolio to minimize potential losses. Investors should stay away from high-beta stocks because they are more unstable and riskier. Instead, they should focus on companies that have strong financial health and good growth prospects. These stocks tend to be less volatile and more resilient during market downturns. Additionally, consider diversifying your portfolio across sectors and asset classes to minimize potential losses. A cautious and selective approach will help investors navigate the current market uncertainty,” Singh said.

How Will Indian Markets Fare In Trump 2.0

Singh projected that Indian markets are likely to face short-term fluctuations. However, he added that the long-term growth of the markets ultimately depends on how India and the US navigate trade relations.

“The outlook for the Indian market in 2025 with Donald Trump back in power is mixed, with both opportunities and challenges. Indian markets may experience some short-term fluctuations, but long-term growth will depend on how both nations navigate economic and trade relations under Trump's leadership,” Singh said.

Singh also projected that export-based industries like IT and textiles may be impacted and additionally, the pharma sector might also face challenges.

“Several sectors may be negatively impacted including exports, particularly in industries such as IT and textiles, due to potential protectionist policies and trade restrictions. The pharma sector might also face challenges if the U.S. imposes stricter regulations or pricing controls on Indian drug exports,” Singh said.

On the other hand defence, energy and infrastructure are likely to trend in the Trump 2.0 regime. He also added that the financial sector might also benefit from increased foreign investment and deregulation.

“Sectors expected to trend include energy and infrastructure, as his pro-fossil fuel policies and focus on infrastructure development could drive growth in these areas. The financial sector may benefit from higher foreign investment and deregulation. Defence stocks could see an uptick due to stronger U.S.-India defence relations,” Singh said.

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