“Higher the uncertainty – Higher the rewards.”
Equity markets after five consecutive months of decline,
bounced back smartly in Mar’25, on the back improving domestic macros, FII
buying and short covering in F&O space.
Markets gave away much of those gains in the first week of
April,2025 as Trump tariffs kicked in creating chaos in all asset class across
world markets.
India’s retail inflation eased to seven-month low of 3.61%
in Feb’25, down from 4.31% in Jan’25. The industrial output (IIP) growth was
above expectation at 5% YoY in Jan’25 against 3.2% in December. The US
inflation fell to 2.8% in February, below January’s 3% and the market
expectation of 2.9%.
FIIs turned marginal buyers in Mar’25, ₹2,014 crore in the
secondary market– after 5 consecutive months of outflows. DII inflows remained
positive at ₹37,586 crore.
RBI Cuts Repo Rate By 25 Bps; Policy stance shifted from
‘Neutral’ to ‘Accommodative’—a positive surprise amidst ongoing uncertainty.
In the much-awaited event– US President Donald Trump
announced reciprocal tariff on imports from 185 countries on 2nd April–
escalating trade tensions and fears of an economic slowdown. US Dow fell over
9% over the next 2 days post this announcement, spiralling into a sell-off in
global equites.
But in a surprise move Trump did a turnaround yesterday and
paused the tariffs for 90 days except China, which gave world markets a
much-required relief. The Nasdaq Composite surged nearly 12%, the S&P 500
rose by 9.3%, and the Dow Jones Industrial Average increased by almost 3,000
points.
Nifty corrected by ~16% so far (till 7th April) from its
peak in the last 6 months. This correction is mainly attributed to modest
9MFY25 earnings growth (Nifty EPS grew 4% in 9M), continuous FII selling since
Oct’24 and a challenging global backdrop. While 4QFY25 is likely be another
weak quarter, expectations for FY26 earnings are still elevated and could see
downgrades, in our opinion.
Trade War: Here’s How To Think About Tariffs – and How
Not To.
1. Common but avoidable ways to interpret the situation:
a) “Tariffs will be rolled back, so it’s just a minor
nuisance.” It’s natural to think a sitting president wouldn’t hurt their
own economy and that this is merely a scare tactic. That may be true—but it may
not. The key is understanding the consequences of even a month of these
measures continuing. Equity markets won’t wait for hope to turn into reality.
Realized losses can become permanent if we panic at the wrong time. This is why
asset allocation matters deeply. Men are known to do stupid things—and men in
power, even more so.
b) “India’s tariffs are at 26% and China’s at 54%, so
we’re better off. “Not quite. Trade wars have a broad, debilitating effect on
global growth. Don’t just focus on sector-specific impacts. When global trade
slows, the hit to overall growth is significant.
c) “India’s exports to US is only 2% of India’s GDP and
therefore we are unlikely to see a large impact.” This is a suboptimal framing
of the problem. Trade wars are never bilateral. China, on which 104% tariff has
been imposed (as of 9th April) can’t export at the same prices to US, it could
dump it goods in another country where tariffs are lower. This recipient
country is likely to retaliate, and this could take shape of a multilateral,
global trade war. India’s exports are 12% to GDP and could be at risk if
countries start imposing tariffs, not just on US, but on each other as well.
d) “If we survived COVID and the 2008 GFC, we can
survive this too.” A better mindset is to prepare rather than assume
survival. Portfolios built with conservative asset allocation, diversification,
and risk control can survive any market. Otherwise, deep losses can trigger
poor behavioural responses at the worst possible time.
2. How to think about the trade war:
a) Best case: Trump reverses tariffs to pre-April 2nd levels
or announces a temporary moratorium. This would be the strongest form of damage
control and likely a short-term positive for markets.
b) Most likely case: Trump agrees to bilateral negotiations.
This opens the door to a wide range of winners and losers, potentially keeping
markets volatile and nervous.
c) Worst case: Other nations retaliate—not just against the
US, but against one another. This scenario could have a serious impact on
global and Indian growth. Markets won’t take this lightly—and with every
passing day, this outcome becomes more probable.
3. How should investors act:
a) Avoid trying to predict or forecast the future of tariffs
or the markets. Focus on exposing yourself to strategies which have a quality
bias and are valuation respecting. Since investing isn’t an exact science, use
staggered purchases. There’s no need to rush.
b) Save emotional capital in times of turmoil by reducing
the number of actions and transactions you do. High activity is an enemy of
long-term compounding.
c) Most importantly, these unknown events create bargain
opportunities in equities and other assets. Investors which have a multi-asset
or conservative approach can take benefit from these events. When investors
sell in an emotional response, the patient investors can gain from the bargains
created. Stay the course.
Investment Strategy: Nifty range 22,000-2400; with downside
limited. Tariff pause is a clear signal, worst is over. RBI rate cuts, lower
inflation, tax benefits to kick-in, good monsoon, good Q1, valuations
correction, FII buying – what other indication of a recovery does one need. So
double up your investments, such opportunities comes rarely.
Conclusion: Indian markets have corrected 16% from peak.
While large caps are now at cheaper levels, mid and small caps valuations have
become fair over long term averages. Geopolitical risks and trade tensions will
keep markets volatile in the short term, but corrections are overdone.
Therefore one should continue gradual equity investments over the next two
months, with a focus on large caps. FII buying has restarted & consistent
domestic buying is expected to drive markets higher.
