Moneycontrol Pro Panorama | How to face your tariff dragon

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Dear Reader,

US President Donald Trump is making good on his promise of hitting trading partners with reciprocal tariffs with the first one to the automobile industry. Trump has said that America will impose 25 percent tariffs on imports of automobiles and ancillaries from April 2. We wrote about its impact and what investors have in store in our yesterday’s Panorama. We also explored the impact on Indian companies here and why a critical metal, copper, is facing heat here.

Investors are flying blind into the tariff tempest that awaits since details of America’s tariff plan are not clear yet. It is only wise that investors learn to navigate multiple outcomes that could hit them and become adept at picking options that either withstand or outlive the tariff turmoil. It is best to be armed to face the tariff dragon in whatever form it may come.
Analysts, market experts and even geopolitical technocrats have tried to guess the shape of Trump’s tariffs.

Since Trump threatened tariffs after taking over as President, equity markets have been on edge. At home, the Nifty has tumbled 8.6 percent in the past six months and has seen more weaker sessions than stronger ones. Tariffs are bad news for exports and as India’s top market decides to pull back, firms are bound to feel the pinch on their revenues and profits. The story elsewhere in Asia has been the same with most Asian economies reeling under the tariff threat.

Analysts at Nomura have worked out the vulnerabilities of countries to Trump’s tariffs. “If India’s tariff on imports from the US is 9.5%, and US’s tariff on imports from India is 3%, then the reciprocal tariff would be 6.5%,” they wrote in their note. By this yardstick, India, Thailand, and Brazil were the most vulnerable according to them.

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But when the tariff on auto and autos parts makers were confirmed yesterday, the Nifty gained 0.5 percent. Of course, it is measly, given the declining trend so far. Even so, markets seem to do fine beyond automobiles. The mood seems to have shifted slightly towards positive.

Some of this could be that investors are looking towards relief by way of policy rate cuts. The Reserve Bank of India’s (RBI) monetary policy committee will huddle on April 7-9 to vote on the policy rate, and expectations of a cut are gaining currency every day. Tariffs are a headwind for monetary policy too, but there seems to be little reason to fret over them when retail inflation has conformed to the trajectory expected by the RBI and growth is looking increasingly vulnerable.

Financial stocks have rallied and the change in monetary policy stance seems to be the singular reason behind their gains. Ananya Roy in her column elaborates how financial stocks could be heading for their investment potential. “In the prevailing environment of policy uncertainty, dichotomy within sectors can be expected to widen and stock selection will be key. Arguably, the only exception is the banking and financial services sector, wherein almost the entire sector is available at attractive valuations after years of underperformance.”

The financial sector may be protected from the tariff onslaught, but several others will get hit hard. Our Chart of the Day gives a sense of where the pain might be more and where it could be manageable. Analysts at Emkay Global Financial Services believe that sectoral tariffs will hurt more than broad tariff levies by America.

Of course, diplomatic channels are hard at work and media reports indicate that talks with America could result in some concessions. There are several areas where India can lower tariffs without much damage. “Given Trump’s love for a deal, India should pursue negotiations with the US by offering concessions in some key sectors, which would not hurt domestic industry, but are important politically/economically for Trump, in exchange for tariff mitigation elsewhere. We identify these ‘Easy Wins’ as: i) increase energy (crude oil, natural gas) imports from the US, ii) increase defence purchases and co-operation, iii) reduce tariffs on certain agri/food commodities, and iv) lower tariffs on foreign EVs,” analysts at Emkay wrote in a note.
Indeed, there is a way out of the tariff pickle and the impact feared by investors may be not altogether debilitating. That said, there is no doubt that the coming weeks would be rife with Trump’s tariff details trickling in (or tweeted off) and investors would need to be agile.

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