Daily Voice: India won't compromise despite short-term pain from US trade deal, says this Investment Strategist

Both the sectors are very critical to the US economy and specifically the Trump administration. Copper is part of the US Department of Emery’s list of Critical Mineral’s list. It is important for the energy sector, and specifically for solar and EVs as well as for electronics. It is also a strategic mineral with applications in Defense. Similarly, Pharma sector is important since India’s generics provides significantly cheaper medicines to the US residents compared to the branded drugs. In fact, the administration is trying to control the price of drugs with formulas to cap the pricing in the One Big Beautiful Bill and also in the executive order on the Most Favoured Nation pricing policy.

Copper prices are already hugely elevated compared to global prices. Besides the above discussed critical and strategic sectors this would impact the normal consumer durables too, thus making everything consumers buy expensive and contrary to the plan to bring manufacturing onshore into US, it could actually make the foreign produced goods which require copper and other tariffed-raw materials cheaper. Thus it would go against the intent.

Similarly, Pharma tariffs would go against the intent. Also, the Pharma tariffs are clearly a threat given the year/year and half timeline for imposition of the tariffs.

It is more of a negotiating tactic so that specific countries for whom it matters most incorporate that in their trade deals. For India copper is not so significant as an export item to the US but if incorporated in a trade deal with comparatively lower tariffs it might actually provide an opportunity to India to become one of the top suppliers to the US, which currently it is not.

On the Pharma front too, if the 200% is a real threat and we negotiate a trade deal with lower tariffs for India Pharma and also possibly some other benefits if Indian pharma produces some portion in the US, then it could actually be an opportunity. Generics are probably not the real target of the tariffs. More likely tariffs are intended to remove or reduce the price discrepancy in the branded/patented drugs which charge much more in the US compared to other developed countries.

Do you think the ongoing tariff discussions are being vastly exaggerated at this point?

If you mean exaggeration as in very large numbers being in terms of percentage tariffs, then yes, they are quite large. However, the US trade deficits with most countries are also very large and this is a way to initiate a discussion about those trade deficits with the respective countries.

As far as India is concerned, India is clear that India is willing to do any deal with any country which is a win-win for both entities. As well as, India is not going to compromise on its national interest even if there is short term pain for it. The national interest covers agriculture as well as certain key areas related to long-term national security.

As one of the largest economies of the World and the one where a lot of the global supply chain restructuring can happen from the present supply chain architecture, with a young, educated workforce for which there is no other country which can substitute in terms of quantity and quality, democracy and capitalism, India has huge negotiating power in any trade deal.

Are you genuinely concerned about the fresh tariff updates from the Trump administration when making equity market decisions, or do you believe markets will largely ignore these announcements and instead shift focus to India Inc's earnings performance?

Anything which will impact revenues and earnings of Indian companies cannot be ignored. If fresh tariffs are going to impact the company fundamentals of listed Indian companies, then the markets have to take cognizance of that. So we cannot take the position that markets will ignore any tariff related announcements. Any tariff related policies which impact the revenues and earnings will be incorporated by the markets after assessing the potential long-term impacts.

Yes, if some policies look like they are short-term negotiating tactics, then they might be incorporated in the markets reactions to a limited extent.

Focus of Mr. Market is always on the India Inc. earnings performance in the long-term. Tariffs are one of the factors which could impact those.

Do you strongly believe that Indian economic growth will remain resilient and unaffected by the imposition of Trump-era tariffs?

The Indian economy is nearly $4 trillion while the US-India trade in 2024 was around $130 billion. This is hardly 3% of Indian GDP. So it cannot have too large an effect on the Indian economy even after accounting for multiplier effects. Of course, psychologically any negative announcements have an immediate shock value.

Do you expect the US Federal Reserve, under Chair Jerome Powell, to hold off on cutting the Federal Funds Rate in July and possibly opt for a 25 basis points cut in September instead?

Yes, the Fed is unlikely to cut unless the data supports the move. Also, they need to observe the still evolving impact of the tariffs on the countries from which US imports. The tariffs could lead to supply chain disruptions and thus inflating the costs of goods sold in the US markets. This is in addition to the higher costs to consumers because of tariffs. The Fed is going to be very watchful on the impact of this on the inflation as well as the GDP.

Only when there is comfort that inflation is likely to stay in control while the GDP looks to be weakening will the Fed cut rates. But currently the Fed funds rates are quite high and there is room for the Fed to cut. So it is more about avoiding a potential inflation spike similar to what happened due to Covid supply chain disruption. The Fed wants to be ready for a Tariff supply chain disruption based inflation.

Do you believe the FMCG sector could positively surprise the market with its June quarter earnings performance?

Currently, this looks unlikely, but it is possible. We don’t think that is the main issue for FMCG. The issue is more about long-term growth competitiveness of the listed FMCG versus the hypercompetition in the sector from startups focusing on innovating with new product categories which is where the growth is.

How do you interpret the Jane Street manipulation controversy, and do you foresee any significant changes or structural reforms in India's trading ecosystem as a result?

We are very clear that any manipulation and gaming of the free market system and breaking of regulations should be strictly dealt with. SEBI is one of the most advanced and strict regulators across the global markets. They have taken action after a rigorous study of the case with full data to back their stance. This is not the first time that SEBI has shown such a rigorous process of enforcing the law. We expect that this should definitely result in reforms to avoid such issues in the future.

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