Moneycontrol Pro Panorama | Did tariffs kill the cat?

Trump said America will impose reciprocal tariffs on its trading partners from April onwards.

Dear Reader,

After a ten-day rout, India’s equity indices are seeing a relief rally today. Whether it is a dead cat bounce is anyone’s guess but the fact that investors seem marginally relieved on a day when US President Donald Trump all but pulled up India for its tariffs and threatened reciprocal ones is perplexing. “India charges us auto tariffs 100%...the system is not fair to US, it never was...on April 2, reciprocal tariffs kick in and whatever they tariff us, other countries, we will tariff them...whatever they tax us, we will tax them,” Trump said in his address to the US Congress. Very likely, the rebound is due to US Commerce Secretary Howard Lutnick's remarks in an interview that President Trump may make a U-turn on tariffs with Canada and Mexico as early as tomorrow.

Trump’s speech entrenched his America First campaign firmly among lawmakers and reinforce his threats on tariffs, including reciprocal tariffs. Trump said America will impose reciprocal tariffs on its trading partners from April onwards. It has already slapped tariffs on Mexico, Canada, and China. The European Union is also in the firing line and would see tariffs sooner than expected. Martin Wolf in his piece for Financial Times here, free to read for Moneycontrol Pro subscribers, explains in detail how Trump’s approach and policies stand to hurt the world. Vivek Kelkar explains the complexity of trade deals between US, EU, India, and China in this piece here.

Asia has been on Trump’s radar for long since the continent runs a high trade surplus with the US. While the focus has been only on bilateral trade in Trump’s tariffs, Asian economies are intricately linked with the world through global supply chain networks and America is too. Our Chart of the Day highlights how Asia would be impacted by the tariffs not just directly but also through these links. India is less vulnerable, but its automobiles and electronics can be hit hard.

That is why the fact that automobile shares and even those of electronics saw gains today is ironic. Is it just bargain buying after big investors with deep pockets continued to urge everyone in the market to bottom fish? Or is it a desperate attempt to believe in the over-optimistic narrative created some quarters ago. The earnings performance of companies has been better but nowhere near robust, which means valuations aren’t really keeping up with reality. Indeed, Kotak Institutional Equities has warned yet again that there is enough froth despite the more than 20 percent decline from the peak for the Nifty. Notably, analysts at Kotak warn that the argument of flows determining market levels is deeply flawed. “A few basic facts about the market remain underappreciated: (1) there is no money in the secondary market; somebody buys, somebody sells at all prices, (2) expectations of returns influence the action of buying (inflows) or selling (outflows) of an investor and (3) the price of a stock is the clearing price based on the expectations of all market participants,” the Kotak report states.

Kotak analysts find value only in banking stocks, though the fall here hasn’t been as marked as the rest of the market. Note that bank stocks have continued to be weak, but banks and their balance sheets have never been better. Dinesh Unnikrishnan’s piece on bank stocks here explains why banking stocks are better placed to bounce back once the pressure eases on the broader market. Indeed, tariff talk and the ensuing global uncertainties are weighing heavily on investor sentiment, even for stocks with solid fundamentals.

But for the rest of the market, it remains to be seen whether more pain is in store. If Kotak analysts are to be believed, more pain is better as valuations still do not accurately reflect fundamentals. Specifically, stocks of public sector units are trading at unfathomable valuations in relation to their revenues and profits. “Investors waiting for a revival in ‘narratives’ and a rebound in ‘narrative’ stocks may want to note the following: (1) the cat may be already dead, (2) the cat will likely be dead if it is dropped from a sufficient height (despite a cat’s fabled nine lives) and (3) the image will be too ghastly to imagine,” Kotak analysts warn.

The upshot is that while much of the uncertainty of whether tariffs are coming or not is now past, what follows is the unpredictability of the impact of Trump’s tariffs as it cuts through global supply chains.

But it would be foolish to attribute the blame of melting markets to Trump’s tariffs alone. A cyclical growth slowdown, a private capex cycle that refuses to revive and consumption growth showing only the bare minimum signs of recovery are all factors that are and should rule valuations.

Or is the cat is both dead and alive, a la Schrodinger?

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Aparna Iyer Moneycontrol Pro