Uncertainty is normal in economy and markets. As the Nobel laureate economist George Stigler famously said, “abnormal is when everything is normal.” But sometimes the degree of uncertainty spikes and economies move from stability to high volatility. A period of stability with sustained and impressive growth for the global economy was 2003-07 when the global economy grew by above 4.5 percent a year. Such periods of stable high growth and impressive corporate earnings create a boom in stock markets. Cyclical upturns are followed by cyclical downturns. Booms end in crashes, followed by recovery and expansion again. Uncertainty is a common feature of all cyclical moves.
Presently we are going through a phase of heightened uncertainty. President Trump’s tariff tantrums have unleashed an unprecedented level of uncertainty in global trade. It was widely known and anticipated that President Trump will use the tariff weapon to single-mindedly pursue his agenda of Make America Great Again (MAGA). But in practice, Trump has transformed from President Trump to Mr. Chaos with frequent flip-flopping on tariffs: imposing tariffs on one day; freezing the same after a few days; reimposing the tariffs again; exempting certain goods, like autos from Mexico and Canada, after a few days and so on. Such frequent flip-flopping on trade policy is unprecedented, and if this continues for long, it will certainly impact global trade and global growth. All economies, including the US, will be impacted.
Now, we don’t know how these trade tensions will pan out. We will have to wait and watch. Trump has declared that reciprocal tariffs will kick in from April 2nd onwards. India, ‘Tariff King’ according to Trump, is unlikely to be spared.
Sooner or later, President Trump will have to come to terms with the economic reality. Trump’s tariff policy will take a toll on the US economy through lower growth and higher inflation. In the March18th policy announcement, which left policy rates unchanged, the Fed lowered the US growth projection in 2025 to 1.7 percent and raised the PCE inflation target to 2.6 percent. Even while indicating two rate cuts in 2025, Fed Chief Jerome Powel clearly stated that ‘further rate actions will depend on incoming data and evolving outlook.’ If tariffs lead to higher inflation, it is possible that the Fed might turn hawkish. This will have Implications for stock markets globally.
How should investors respond to this heightened uncertainty?
History teaches us that uncertainty will not last; stability will emerge from chaos. Meanwhile, uncertainty provides opportunities. Investment strategy can be flexible during these difficult times. One option is to tweak portfolios in favor of domestic consumption themes which will be least impacted by Trump tariffs. Financials, telecom, hotels, aviation, select autos, FMCG and industrials are safe domestic consumption themes. Once clarity emerges on the reciprocal tariffs front, investors can take a call on investing in export-oriented sectors like pharmaceuticals and IT.
A consequence of the recent market correction is that retail investors with portfolios heavily skewed in favor of mid and smallcaps suffered big value destruction. On the contrary, largecaps suffered only minor cuts and have quickly recovered. Another significant takeaway from the recent market experience is that three-to-five-year SIPs in mutual funds have delivered impressive returns. This highlights the importance of SIPs and the need to continue with SIPs during the ups and downs in the market. From the Indian economic perspective, FY26 is likely to be a year of recovery in growth and corporate earnings, which bodes well for the stock market.
