Dear Reader,
Policy uncertainty is the talk of the town. The Economic Policy Uncertainty Indices from policyuncertainty.com show that uncertainty levels have shot up since Donald Trump took over as US president in his second term.
How high have these indices gone? Well, the US Policy Uncertainty Index for February 2025 was at 335, compared to 109 in October 2024. It was much higher though in May 2020 during the first stages of the COVID pandemic, when the index was at 504, although it was never so high during Trump’s first term. Also, surprisingly, the index was much lower during the Global Financial Crisis in 2008.
The Global Policy Uncertainty Index, though, had the highest ever reading for the index in February 2025 at 460, and this index goes all the way back to 1997. It was higher in February 2025 than during the worst months of the pandemic. The inference probably is that Trump’s trade wars and his geopolitical policy changes will have a bigger impact globally.
More or less similar results are obtained from other such indices tracking policy uncertainty. This FT story, aptly titled ‘Certainty is now a scarcity in markets’, said, “If Washington continues to alter trade, geopolitical, and employment policies at a whim and not allow companies and investors to fully assess economic fundamentals, investors are likely to shift portfolios towards the security of stable earning streams.” That is what is happening, with a migration in the US markets from equities to the safety of bonds.
As we have seen, other countries won’t take Trump’s tariffs lying down—They will retaliate, and the end result is likely to be a negotiated settlement. Indeed, Trump’s policies may well be good for other nations, leading to much-needed reforms, as seems to be happening in Europe. As Ruchir Sharma wrote here, “Let’s not forget that when a nation has its back to the wall, it is often forced to carry out serious reform. And recovery follows. The cycle turns constantly, and the circle of life is always creating new stars somewhere.”
Could that happen in India as well? Well, there is certainly an attempt to boost local defence production, and we pointed out, using SIPRI data, that India’s declining share of global arms imports reflects its growing defence self-sufficiency. The investment implications are obvious and we said that, with the correction in the stock, HAL is now trading at reasonable valuations, considering the order pipeline and earnings visibility.
To be sure, the tariff threat looms large over Indian markets, and we pointed to the risks for Indian auto component exporters and to the slow revenue growth estimates for IT firms, at odds with their valuations.
Nevertheless, India holds several good cards. Unilever’s new CEO, for instance, said that the US and India are Unilever’s main anchor markets and ‘accelerating in India’ is very important to him. My colleague Abhijit Dutta wrote that, in light of the Chinese foreign minister’s talk of a dance between the elephant and the dragon, “crafty negotiations and subtly playing the China card can help it clinch a mutually beneficial bilateral trade deal with the US”. Our columnist Saibal Dasgupta analysed whether Trump’s tariffs could bring India and China closer.
Indeed, Indian firms are already adapting to the new environment, the tie-ups with Starlink being a case in point. We pointed out that several pharma companies are increasing their footprint in the US, such as Sun Pharma here and here and Syngene.
At the same time, with inflation coming down, we said, “Monetary policy must now step up and deliver, in order to support the economy against the likely external shocks.” We pointed out that low oil prices provide room for fiscal and monetary policy manoeuvring in India and the Monetary Policy Committee is likely to cut policy rates next month. What’s more, sectors such as travel and tourism haven’t been impacted so far, and we said that Ixigo and Royal Orchid Hotel’s valuations look attractive. And while the Indian Meteorological Department predicts a scorching summer, here are some ways to profit from it.
In this FT column, Mohamed El-Erian lays out two scenarios for the global economy. He writes: “The optimistic view anticipates an upward convergence of global growth, with Europe and China accelerating to get closer to the hitherto exceptional performance of the US economy. This would result in a higher overall level of global growth as a short-term US deceleration is more than compensated by the pick-up in China and Germany. The more pessimistic outlook would be a downward convergence featuring stagflation. This scenario would be due to delays in Germany’s policy implementation; China’s continued struggle to balance stimulus and reforms; and a US economy decelerating towards stall speed amid low consumer confidence, job insecurity, a corporate wait-and-see approach on investment, and the stagflationary pressures of tariffs.’
The rise in uncertainty leads to putting off decisions, especially decisions on investments, and thus affects the economy and the markets. Note, though, that in spite of the huge rise in the economic policy uncertainty indices, neither the CBOE VIX nor the Nifty VIX are anywhere near their highs, indicating the markets do not believe the situation is so dire. Perhaps investors feel that, as a research note from Citigroup put it, “as the negative tariff and government spending consequences are now being digested, we would not expect the entirety of 2025 to be an endless barrage of incrementally weaker news”.
The caveat is, as Monsieur Morrel said in ‘The Count of Monte Cristo’, “Shall I tell you plainly one thing, sir? I dread almost as much to receive any tidings of my vessel as to remain in doubt. Uncertainty is still hope.”
Cheers,
Manas Chakravarty
In case you missed them, here are some of the other stories and insights we published this week, apart from our technical picks in the equity, commodity and forex markets:Stocks
IndusInd Bank, Should investors bet on IDBI Bank’s disinvestment? Gabriel India, Nazara Technologies,
CMS Info Systems, EMS
Markets
Historical perspective on market declines and recovery
Why options traders are not earning profits
Mutual funds pitch silver ETFs amid volatile markets
New rules for SME IPOs
Financial Times
China’s obesity crisis is big business
Companies and sectors
Zydus’s MedTech plan underlines transformative changes in pharma sector
Merchant power producers in a sweet spot
Stress lurks in two-wheeler finance
India’s P2P lending space needs an overhaul
Economy & policy
India needs to act decisively to combat climate change
Geopolitics & geoeconomics
Deconstructing the DOGE narrative about government debt
Tech & Startups
Startup Street: Does location influence startup funding, valuation?
Innovation hub, high quality talent: Why Nielsen's Karthik Rao is betting big on India
Others
GuruSpeak: Tanmay Kurtkoti: using trading to create a multi-asset wealth model
Personal Finance: How to invest in equity? Pick your best option
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