The last one month has been tumultuous for stock markets. There has been divergent regional trends marked by strength in US markets and weakness in European markets and Japanese markets. India too has been weak. Nifty corrected about 10.5 percent from the September peak. Relentless FII selling, concerns surrounding the earnings downgrade for FY25 and the ‘Trump trade’ impacted the market.
Uncertainty is on the rise, both in geopolitics and on the economic front. The economic consequences of Trump 2.0 are likely to be profound. Trump had promised to cut the corporate tax from the prevailing 21 percent to 15 percent. The market has already started discounting the impact of this potential tax cut on US corporate earnings. Capital has moved from other markets to US, pushing the dollar index above 106. But there is only limited scope for a sustained rally in the US since valuations have reached high levels. S&P 500 is now trading above 24 times trailing earnings.
Trump has declared that he will use tariffs to “Make America Great Again.” The threat is to impose up to 60 percent tax on Chinese imports and between 10 to 20 percent tax on others. Countries having trade surplus with US will be specially targeted. Even though Trump has been critical of India, too, calling India ‘Tariff King’, he is generally pro-India from the political perspective and is likely to continue the US policy of supporting India to contain the political hegemony of China in this region. Trump’s good chemistry with Modi also might be helpful for India. But if Trump imposes high tariffs on China and China retaliates, that might trigger a trade-war which will have far reaching consequences for international trade and the global economy. Also, it will not be easy to practically implement the 60 percent tariffs on Chinese imports in one go. Imposition of tariffs on imports will raise the prices of the widely consumed Chinese products. The consequent rise in inflation will put the Fed in a tight spot. The Fed’s monetary management has been very effective, so far, in bringing inflation down and paving the way for a soft landing of the US economy, by initiating the rate cutting cycle recently. This policy will come under threat if inflation rises again consequent to the Trump tariffs. So, we will have to wait and watch for the developments as they unfold. The relentless FII selling is unlikely to last long. The ‘Sell India, Buy China trade’ is over; the ‘Buy US, Sell Other Markets trade’ also will not last long. FII selling will stop and they will turn buyers at an appropriate time. Their top preferences will be high quality largecaps.
Investors should remain calm during this period of turbulence. The focus should be on value investing rather than chasing momentum. Many investors have lost money recently by chasing momentum stocks, which were climbing up on low liquidity and news flows from social media. There are segments like largecap financials which are fairly valued and have good long[1]term growth prospects. IT and pharma are other safe sectors to invest. In the present context, the ideal way to invest in mid and smallcaps is through SIPs and Systematic Transfer Plans (STPs).
