Trump 2.0 has begun with the feared disruptions. Trump has walked his talk on some of his pet themes like clamping down on immigration and encouraging fossil fuels. The declaration to impose a 25 percent tariff on Canada and Mexico on 1st February for encouraging illegal immigration to the US, withdrawal from the WHO and the Paris Agreement on climate change are indications of the potential disruption that the Trump presidency can unleash. The 1,235-point fall in the Sensex on the day following the Trump inauguration is an indication of the market’s concern about the disruption potential of the Trump presidency. How this plays out remains to be seen.
The 12 percent correction in the Nifty from the September 2024 peak has made the Indian valuations, in the largecap segment, reasonable. There is room for a healthy market rally only if the Indian economy recovers from the cyclical growth slowdown through which it is passing now. Therefore, the focus of the government should be on providing the fiscal stimulus for growth. The MPC can follow with a rate cut in the February meeting, to provide monetary stimulus for growth. The economy badly needs these stimulus measures. Early Q3 corporate results confirm the earnings slowdown. Therefore, the government and the MPC should act fast. Timing is important.
Scenarios can change fast. A few months from now the market talk may be centered on a totally different set of factors. Let’s go back five months to September 2024. The market was at a record high and almost everyone was talking about the Goldilocks economic situation in India. GDP growth was good and corporate earnings were impressive. The fiscal and current account deficits were under control and the rupee was reasonably stable. The situation suddenly changed with an unexpected dip in the Q2 growth rate to 5.4 percent. The slowing economy and the declining trend in corporate earnings in an over-valued market provided the perfect backdrop for FIIs to sell. The attractive valuations of the Chinese stocks facilitated a ‘Sell India, Buy China’ strategy.
The market situation started changing with the Trump victory. The strengthening dollar and the rising US bond yields facilitated a ‘Sell emerging markets, Buy US strategy,’ which continues to play out. How long this continues remains to be seen.
President Trump’s potential for disruption is huge. But it is important to understand that Trump cannot alter the logic of economics. Many of Trump’s actions, including tariffs, are inflationary. And, therefore, he cannot continue with these inflationary policies for long. Trump’s actions will put the Fed, which has started the rate cutting cycle, in a tight spot. The Fed, which always acts on the basis of ‘incoming data and evolving outlook,’ may be forced to go slow on rate cuts in 2025.
Investors need not be unduly concerned about the heightened volatility in the market. Previous bouts of high volatility have taught us that the best response to a storm is to remain calm. Continuing with the multi-asset[1]investment strategy would be the right response under the present circumstances. Also, investors can utilize the market turbulence to rebalance their portfolios. Priority should be given to safety in this difficult time. Safety is in largecaps, which are fairly valued now.
During previous bouts of volatility, investors, particularly the newbies, had stopped their SIPs in mutual funds. This will be a wrong decision. It is important to continue with SIPs. In fact, increasing the SIP amount would be a good decision now.
