December 08, 2024

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TRUMP'S TRADE TANGO

WILL HE, OR won't he? This seems to be the key question being asked around the world as Donald Trump stages a comeback to the White House as the 47th President of the US. Trump has vowed to raise tariffs on imports into the US as part of his plan to rebuild the American economy as the world's greatest one, leaving policymakers and industry on edge around the planet. Trump's proposals on tariffs, which were a part of his election campaign for the presidency, aim to lower corporate tax rates for companies manufacturing in the US to 15% from the current 21%; he also plans to hike tariffs by as much as 60-100% on Chinese imports into the country. For imports from other countries, Trump intends to raise tariffs by 10-20%. These tariff actions could upend global trade and fuel inflation and tighten monetary policy across the US and the world, even if they may boost the American economy in the short runINDIA-US TRADE For now, India seems to have been spared. Trump has pledged higher tariffs on three of the US's largest trading partners--Canada, Mexico and China. He has promised to impose a 25% tariff on imports from Canada and Mexico until they checked drugs and migrants crossing over to the US. Plus, he has vowed to impose an additional tariff of 10% on imports from China. Mexico and Canada are reviewing the announcementIn India, the government is closely monitoring the developments in the US to assess the impact of any such move on the domestic economy that is in the midst of a slowdown, and exports that seemed to have picked up pace only recently. While trade between India and the US has grown steadily over the years, the relations between the two countries have been rocky at times, with numerous disputes taken up at the World Trade Organization and demands by Washington--to lower tariffs and provide more market access--that have often not been accepted by New DelhiIndia's Commerce Secretary Sunil Barthwal has, however, pointed out that trade between India and the US has grown over the course of four US presidencies, indicating greater economic integration of the two countries. "India's exports to the US have grown steadily between 2001 and 2023, which coincides with the tenure of four US Presidents," he said at a monthly press briefing on November 14 when asked about the impact of the US presidential elections on trade with India. "Whatever may be the presidency, we are integrating our value chains with the US, the way we are integrating the two economies through various agreements, including the Indo-Pacific Economic Framework for Prosperity (IPEF) and bilateral mechanisms. We are able to have sustained growth in terms of our share with the US," Barthwal said, adding that he expects this integration to continue growingAccording to commerce ministry data, America's imports from India rose from $9.7 billion in 2001 to $87.3 billion in 2023. India's share in the US's imports increased from 0.9% in 2001 to 2.8% in 2023. In the same period, US imports from India increased by a CAGR of 10.48%, compared with a 4.76% rise in imports from the rest of the world to AmericaThe US remains India's top trading partner, with more than $190 billion in trade; India also serves as a base for major US tech firms like Google, Amazon, and Apple. And India's IT sector relies on the US for 80% of its export revenue.

REALITY CHECK

EVERYTHING WAS FINE on Dalal Street until September. But the joy was short-lived. Come October, a pall of gloom seems to have pushed investors into a plunge pool of uncertainty. The benchmark indices--NSE Nifty50 and BSE Sensex--entered into a correction phase with a sharp 10% decline as of November 14 from their peaks. They had touched their record highs of 26,277 and 85,978, respectively, on September 27Meanwhile, the Nifty Midcap 150 and Nifty Smallcap 250 fell 10.70% and 10%, respectively, from their all-time highs scaled in late September. Earlier, the Midcap 150 index and Nifty Smallcap 250 index had rallied 435% and 514%, respectively, between March 2020 and September 2024A fall of 10% is termed a `correction', while a 20% drop from the highs is called a `bear' marketThe sell-off since October has been triggered by multiple factors, including a tepid earnings season, relentless selling by foreign institutional investors (FIIs), ongoing geopolitical tensions, and a weakening rupeeAs fear and caution replace the earlier excitement, market experts recommend a shift in strategy, advising investors to focus on large-cap stocks and adopt a cautious approachNilesh Shah, Managing Director, Kotak Mahindra Asset Management Company, cleared some of the uncertainties. "I don't think we'll see a major bear market purely from an earnings perspective. In the first half of FY25, earnings per share (EPS) on the Nifty were around `550, with expectations for the full year at about `1,050," he said. Shah expects the second half of FY25 to be stronger, making the target achievable"However, reaching an EPS of `1,250 for FY26 appears challenging, and we may fall short. The economy and corporate profitability are fundamentally strong, so a significant market downturn seems unlikely unless FIIs sell aggressively," Shah said in an interaction with BTTVOn this point, Feroze Azeez, Deputy CEO of wealth management platform Anand Rathi Wealth, says, "From a medium- to long-term perspective, the average annual return on Indian equities is expected to be 11-13%." WHY THE FREE FALL? The magnitude of the correction in markets has been upsetting for some investors. A broad view shows nearly 71% of listed companies witnessed selling pressure between October 1 and November 14, with some stocks falling up to 79%. A sectorwise inspection reveals that the Nifty Oil & Gas Index plummeted the most at 17% during the period. It was followed by Nifty Auto (down 15%) and Nifty FMCG (down 15%)The FMCG sector, in particular, faced headwinds in Q2FY25. Devarsh Vakil, Deputy Head of Retail Research of financial services company HDFC Securities, explains, "In Q2FY25, FMCG firms reported subdued results amid weak demand, especially urban demand, muted consumer sentiment, and the adverse impact from a prolonged monsoon." The combined consolidated net profit of the 15 FMCG companies that are part of the Nifty FMCG index grew just 1% in Q2FY25 against an 8.5% rise a year ago (Q2FY24)"Inflation continues to remain high, especially in agri commodities, impacting margins. Most