A decisive victory for the Democrats in the US midterm elections could provide a modest boost to Indian equities through lower US Treasury yields and improved foreign investor sentiment, but the potential gains may remain limited, according to Bernstein.
The brokerage firm has retained its Nifty 50 target at 25,000, saying that while a Democrat-controlled Congress could improve India's investment backdrop, the long-term market trajectory will depend more on crude oil prices and earnings growth.
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“We retain our Nifty target of 25,000, but expect the long term will be shaped less by which party controls the US Congress and more by energy prices, external balances and sustainability of India's earnings cycle,” Bernstein analysts Venugopal Garre and Nikhil Arela said in a note.
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Bernstein expects increased friction between US policymakers to constrain government spending and borrowing, putting downward pressure on Treasury yields. The 10-year US Treasury yield has already declined 38 basis points from its mid-October levels, while the 30-year yield has fallen 35 basis points.
Historically, falling US yields have supported foreign institutional investor (FII) inflows into Indian equities. Bernstein's analysis of the past 30 years shows that every 10 basis point decline in US Treasury yields has attracted an average of $950 million in foreign equity inflows into India.
Lower US yields could also support the rupee, which has faced considerable pressure this year. A stronger domestic currency would improve dollar-denominated returns for overseas investors, potentially encouraging further inflows.
However, Bernstein cautioned that India may not benefit from this trend to the same extent as in previous cycles. Global investments in artificial intelligence infrastructure and competition from other emerging markets could divert capital away from Indian equities, limiting the scale and duration of foreign inflows.
The brokerage also flagged the risk of a prolonged political deadlock in the US. Disagreements over government funding or the debt ceiling could weaken business confidence, reduce discretionary spending and trigger risk aversion, potentially leading to capital outflows.
For Indian IT companies, the implications remain mixed. While Democrats may be more cautious towards AI investments and could oppose certain immigration restrictions, tighter scrutiny of immigration policies is likely to continue. Moreover, North America contributes over 55% of India's IT industry revenue, making any slowdown in US discretionary spending a significant risk to growth forecasts.
Bernstein added that a Democratic victory is unlikely to materially change Trump's trade and foreign policy decisions, including tariffs on buyers of Russian oil. Middle East tensions and elevated crude prices also remain key risks for India.
Ultimately, Bernstein believes the election outcome marginally improves India's investment outlook, but cautions against expecting significant gains. Energy prices, external balances and earnings growth will remain the key drivers of Indian markets over the longer term.
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