Markets Fall As Trump Tariffs Once Again Take Hold
The markets are tiring and getting tired of Trump’s tactics
On Episode 505 of The Core Report, financial journalist Govindraj Ethiraj talks to G Chokkalingam, Founder of Equinomics Research as well as Jigar Pandit, Senior Vice President - Business Head Commodity & Currency at Mirae Asset Sharekhan.
(00:00) The Take
(05:57) Markets fall as Trump tariffs once again take hold
(06:46) Should investors stay away from small and mid cap stocks
(17:56) Gold prices hit a fresh record high
(23:14) Trump tariffs are making CEOs wary
NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on [email protected].
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Good morning, it’s Tuesday, the 11th of February and this is Govindraj Ethiraj, headquartered and broadcasting and streaming like always from Mumbai, India’s financial capital.
The Take
For several years, India’s IT industry discussed and debated how they should gear up for a VUCA world.
VUCA stands for volatile, uncertain, complex, and ambiguous and needless to add, the best application for this term seems right now, more than any other phase in the past, except maybe one-off events like the 2008 Lehman Crisis or the 2020 Covid pandemic.
Just when you thought US President Donald Trump’s tariff plans were focussed on nations and were just about mentally adjusting to that comes a fresh salvo, this time promising to slap 25% tariffs on steel and aluminium imports into America.
Further, there is an additional threat of reciprocal tariffs on all countries. Which means if you have import duties on goods I export to you, then I will put duties on goods you export to me.
India could take a knock if it is forced to reduce tariffs further as it has already done on Harley Davidson motorcycles ahead of a flying visit by Prime Minister Narendra Modi to meet Mr Trump later this week.
The term VUCA is attributed to management professors Warren Bennis and Burt Nanus and their 1985 book Leaders: Strategies for Taking Charge.
The globalising world and businesses adopted VUCA and it began to be a prominent theme in the last decade in India, though more in the case of IT services, where I encountered it.
But if VUCA was used for globalising, now it is most apt for a deglobalising world.
Back to steel and aluminium, a Bloomberg report says the US relies on aluminum imports from countries including Canada, the United Arab Emirates and Mexico, to meet the vast majority of demand — net imports added up to more than 80% in 2023, according to Morgan Stanley.
Steel imports account for a smaller portion of overall consumption, but are vital for sectors leaning on specialty grades, including aerospace, auto manufacturing and energy, from wind developers to oil drillers.
Interesting, steel and aluminium exports as per the Bloomberg report and chart from India added upto around $2.2 billion compared to Canada’s $20 billion and Mexico’s $7.2 billion.
So you can see where this is going, once again.
How are people reacting to all of this ?
Traders in China’s major export hub of Yiwu are already shrugging off Trump’s latest moves, reports Reuters, quoting one exporter, among others, who buys products in Yiwu on behalf of other customers in markets such as the United States, Australia and the Middle East.
"We can respond by slighting, reducing our profit margins or adjusting costs. In the end, the additional costs will be passed on to the end consumers in their country, meaning they will ultimately bear the consequences of their own economic policies,” she said.
“For the U.S., whether they can find a suitable country to replace us (as a trade partner) is a question they need to consider themselves."
Elsewhere, the administration-friendly WSJ is reporting that it has taken less than a month for the second Trump administration to cool the enthusiasm of chief executives and dealmakers.
Consumer sentiment is down and inflation expectations are rising, driven in part by worries about the impact of a threatened trade war. The deals market just ended its quietest January in a decade.
A Justice Department that was expected to wave through acquisitions instead used to block a big technology merger.
Corporate bigwigs are now using phrases like “fragility,” “volatility” and “wait and see” to describe their outlooks.
That sounds like VUCA to me.
The good news is that India has taken the position that it will not be protectionist and contemplate retaliatory tariffs and the like.
There could be over 30 items coming from the US that could see lower tariffs, apart from the high end bikes and could include high end cars and solar cells.
And maybe California almonds.
Did you know that India is the biggest export market for California Almonds as of 2023 as per the Almond Board of California.
And that was for three consecutive years despite being at a tariff disadvantage to countries like Australia.
While Trump’s daily tariff threats are creating havoc with trade and businesses, it does appear that all India has to reduce tariffs.
A quick background
India’s average tariffs declined from 125 per cent in 1990-91 to 13 per cent in 2014-15, according to a study reported in the Indian Express.
Though since 2014 there have been around 3,200 tariff increases, with the largest increases occurring in 2018, according to a paper by economist Shoumitro Chatterjee and the former chief economic adviser to the government of India, Arvind Subramanian.
These large tariff increases, linked to the government’s call for atmanirbharta or self-reliance, have led the average tariff rate to rise to around 18 per cent, affecting a sizable segment of the country’s trade basket.
Moreover, India’s tariffs are amongst the highest in the world.
In fact, they are not only higher than those of China (7.5 per cent), but also countries like Vietnam (9.6 per cent) and Bangladesh (14.1 per cent).
High tariffs, as the Government’s own economists like Arvind Panagariya have argued that India cannot be an export powerhouse without being open on the import side.
He also has argued several times in the past that signalling this is very critical.
Perhaps this is the golden opportunity to heed Dr Panagariya’s advice, among others and open up further, Trump or no Trump.
The downsides seem very low if at all because revenue lost on customs duties will be made up elsewhere as exports rise.
This is a good time to move with speed and determination.
Else we will be left munching almonds, at lower duties of course.
And that brings us to the top stories and themes for the day.
Markets fall as Trump tariffs once again take hold
Gold prices hit a fresh record high.
Should investors stay away from small and mid cap stocks.
Trump tariffs are making CEOs wary.
Markets
The week began on a weak note, not surprisingly, now that the markets are tiring and getting tired of Trump’s tactics.
As we have discussed on The Core before, it is surprising that Trump, a businessman , does not realise that uncertainty is terrible for markets and businesses.
Of course the US is entitled to slap tariffs for whatever reason it wants to but surely there could be more methodical ways of doing this rather than a daily whack a mole.
Anyway, the benchmarks were down.
The BSE Sensex closed down 548.39 points, or 0.70 per cent, to settle at 77,311.80 though it recovered from the day’s low of 77,106.89 on Monday.
The NSE Nifty50 also down 178.35 points at 23,381.60, also recovering from a low.
The Nifty Smallcap100 and Nifty Midcap100 indices ended down by 2.12 per cent and 2.11 per cent, respectively.
There is an interesting debate that has erupted between fund managers in India’s mutual fund industry.
ICICI Pru CIO S Naren remarked at an event that people should get out of systematic investment plans (SIPs) in small cap funds while the others have jumped on him saying in the long term.
“We think it is a clear time to take out lock, stock, and barrel from small- and mid-caps,” Naren had said in his address.
"The entire risk is now borne by you (the distributor) and the investor - 100%. So, the entire problem of any loss will also be borne by you, 100%. "
Of course the rest of the industry sees this as breaking ranks while the way I would interpret it, this is an investment manager expressing his frustration because his sales colleagues are able to sell small cap and mid cap stock funds more easily than say large cap.
"I do not believe that this is the time to invest in small and mid-cap SIPs. But I am unable to convince my sales colleagues. I tried my best but failed miserably. But I believe that this is the time to stop SIPs in small and mid-caps because they are so overvalued."
Essentially he is saying that people will lose their shirts and they will suffer more than the mutual fund or asset management company.
Obviously the larger question is the valuation of small caps and mid caps.
Guests on The Core Report have consistently pointed to the dangers in plunging into small and mid caps and highlighted the overvaluation for over a year now.
Of course in that period, the market has corrected and gone up and down again.
I reached out to G Chokkalingam, Founder, Equinomics Research and began by asking him to take a broader look at the markets and these recent comments.
INTERVIEW TRANSCRIPT
G Chokkalingam: To some extent, it may be applicable to mutual fund industry, maybe. The way the mutual fund invests is different from the PMS people investment. And these two are different from individual retail investors investment, the HNI investment.
So the patterns are extremely different. Now, mutual funds have inherent constraints. Now, they cannot invest in illiquid stocks or very low liquidity, low small cap, too small cap, because if there is a redemption, they have to go.
So therefore, in the industry, what happens? They invest large amount of money, index based small and mid caps. So there is a structural change.
If you see over the last 20, 30 years, what was a large cap now become a small cap in terms of the category. You know, 30 years back, large cap used to be about 10,000 crores. Last year, at the peak of the bull, beyond 250 stock, it is small cap.
And 251 stock, rank number 251 stock, its market cap was 26, 30,000 crores, which we used to call large cap 30 years ago. So the point I'm trying to tell you is that because of the nature of the mutual fund, they tend to invest largely, you know, the index based small cap stocks, index based mid cap stocks. And invariably, most of them are costly in valuation.
It is very difficult to find cheaply valued stocks in the top 10, 20 index stocks. And they can't go for bottom up approach in terms of cheaply valued, but illiquid. So therefore, there can be a constraint.
But this is not applicable for equity investing for everybody. Now, first of all, in bear market, I have seen bubble in the individual small and mid cap stocks. In the bull market, I have seen very cheaply valued small and mid cap stocks because the universe is more than 4,000 now.
So there are many few understocks one can always find comfort in the bull market. In the bear market also, one can find a lot of stocks attractive valued. So if you're not willing to invest in the bear market, that to now, 70 lakh crore, rupees 70 trillion meltdown has already happened.
Now, after this also, if you don't find comfort in any individual stock, then when will you find? So point one, the universe is too big. Your logic of median and all may not be applicable.
And two, SMC, small and mid cap stock is not a homogenous group. It is heterogeneous. So many diversities within that.
So irrespective of the market condition, you always find bubble and opportunities. Third, market is down 70 trillion rupees. So it has really thrown a lot of opportunities.
Fourth, even if you assume this is the time to get out of small and mid cap. Now, on the other hand, FIs are selling every day. And most of their sellings are happening in the large cap.
So does it mean that you stay away from the whole market itself? Then everybody tends to think, then what you saw during COVID pandemic, double that pain or 10 times that pain will see. So that is not the way the market behaves.
Yes, I do agree, the mutual fund managers have certain limitation, but that is not applicable to all other investors. It is proven again and again, particularly the most successful investors are the one who has accumulated a lot of quality stocks in the bear market, not the one accumulates in the bull market to make a lot of wealth.
Govindraj Ethiraj: But there is a specific demand supply challenge, as in there's too much supply because investors are consistently putting money into systematic investment plans of mutual funds for small and mid cap investing, and which is perhaps where they find it more attractive or lucrative. And the fund manager herself or himself is struggling, because obviously, right now, valuations are high. And overall market forecast for this year, at least is not looking as bullish as it was earlier.
So to that extent, is the ICICI Prudential fund manager fair in saying that, you know, maybe you guys need to pull out right now, and maybe come back later? I'm not sure he said that, but I'm sure he means that.
G Chokkalingam: Last year, at the peak of the bull market, they said, we stopped taking money. After 70 trillion washout, are we panicking on the valuation? We may be panicking on the market.
You know, the market might correct, but that is pattern of the markets. In 2010 November, 2013 November, if my memory is right, Sensex was down more than 25%, 20-25%. So all mutual funds are negative.
So we have to accept that. But the point is, it doesn't mean that you have to invest in the overvalued stocks. Today, what is the problem?
A lot of IPOs, the companies which qualify as a venture funds, before the venture fund cycle got successfully completed, they rushed to the market and listed. What do I mean? They lost money, and they are down 50%.
And some of the companies which were doing a traditional business on a digital platform, suddenly got overvalued 100 PE, 80 PE, and they are the stock which are down 50%. So bad experiences should not guide you to create aversion. There are hundreds of small and mid-cap stocks still reasonably valued.
So that's an opportunity. So therefore, I would say that, don't shun the pocket of small and mid-cap category as a whole. Within that, shun segment of overvalued stocks.
So that is a challenge for the fund managers.
Govindraj Ethiraj: Correct. Your advice is to the fund manager or to the investor in the fund which is being managed by the fund manager?
G Chokkalingam: I would say that even fund manager has to do this. There are various segments, but you caution the investors. You know, you caution the investors.
Because India's story ultimately is a great story. A lot of small caps only eventually evolved as a large cap. Infosys was a small cap.
If you permit me to quote, when I placed an order for Wipro in 92-93 or 93-94, my dealer refused to accept my order. He said, sorry, it's a tiny small cap. I'm sorry, I cannot spend enough time to buy for you.
Govindraj Ethiraj: But was it even an IT company at that time? Or I think it was a Vanaspati company or something.
G Chokkalingam: It was a diversified company. But IT business was, if my memory is right, around 750 crore revenue. It was a dominant force of it was a diversified company.
So, small caps only evolved largely. Now also, if you see, two-third of the large caps debuted as a small cap. But recent time, the large caps directly debuted as a large cap because the market dynamic changed.
The entire market cap has shifted vertically. And there are a lot of big companies also coming, starting with the TCS. But otherwise, traditionally, the small cap evolves as a large cap.
And as I mentioned, you have to make a distinction between the category as a whole, the pockets of overvaluation. To give an example, BSE, it was 150 rupees if you adjust for the bonus. It has gone up 30 times.
I'm not making any view on the stock. So, the point I'm saying, such a tiny small cap, it has become a reasonably large cap. To deal with the problem, maybe you position your small and mid-cap as a three-year fund, five-year fund.
Tell them that within three years, five years, it's a closed-ended. You cannot take the money. But you invest in the stocks where you have got a lot of appealing valuation.
So, that is a way that a lot of HMEs have made enormous wealth in the country. That is a way many professional investors make investments. Still, I should admit that they have a problem.
They have to invest as a fund as a whole. So, they find it very difficult to concentrate in deep value, small cap, illiquid counters. So, one should agree that limitation.
I mean, one should accept that limitation. Otherwise, opportunities are there.
Govindraj Ethiraj: Right. Chokka, thank you so much for joining me and sharing your thoughts.
Rupee
The Indian rupee hit a fresh all-time low on Monday in the wake of U.S. President Donald Trump announcing fresh tariff plans, which drove regional currencies lower, while persistent portfolio outflows remained a sore point for the local unit.
The rupee weakened to 87.95 against the U.S. dollar before closing at 87.4750, down slightly on the day, Reuters reported.
The currency managed to pare most of its losses due to strong central bank intervention, exporters' dollar selling and profit-booking by speculators holding long USD/INR positions, traders said.
Asian currencies were mostly weaker, with the offshore Chinese yuan down 0.2% at 7.31. The dollar index was down slightly at 108.2.
Gold Prices Up
Gold prices jumped more than 1% on Monday to hit a record high, as safe-haven demand surged on fears of a global trade war for reasons we have already, well discussed.
Spot gold was up 1.5% to $2,903.19 per ounce on Monday afternoon after hitting a record high of $2,905.98 earlier in the session - its seventh record this year.
U.S. gold futures rose 1.5% to $2,929.70.
India’s gold prices are also edging towards Rs 90,000 per 10 grams now.
So where could they and what could drive them ?
I spoke with Jigar Pandit Senior Vice President - Business Head Commodity & Currency at Mirae Asset Sharekhan and asked him about assessing the factors that could drive prices up
INTERVIEW TRANSCRIPT
Jigar Pandit: Certainly you have nailed the question in terms of the institution buying. So I'll just take you on some statistics numbers. If you talk about 22, 23 and 24, the gold purchase by the central banks are almost double of what they bought it in from 2010 till 2021.
So when I'm saying double, so from 2010 to 2021, the average central bank buying on a yearly basis was anywhere between 475 to 500 metric tonnes. But if you talk about 22, 23 and 24, the average yearly buying was something around 1050 metric tonnes. In last three years, central banks have bought extremely high.
So that's one of the reasons why gold have gone up and then followed by the geopolitical tension and then all those things. But central banks buying has definitely played a big role in terms of pushing the gold prices to a new high.
Govindraj Ethiraj: So you're saying a total of about 1000 tonnes per year were bought by central banks between 22 and 24?
Jigar Pandit: Yearly around 1050 metric tonnes they have bought in 22, approximately 1038 metric tonnes in 2023 and nearly 1000 metric tonnes in 24. So every year they were buying 1000 plus metric tonnes from last three years.
Govindraj Ethiraj: How are you seeing the trend right now in 25 calendar? Are you seeing that this is continuing? Is it stepping up?
Jigar Pandit: So from central bank buying, yes, definitely it is stepping up. One is definitely few of the countries where central banks wants to definitely reduce the dollar reserve exposure and increase the gold reserve. So that's one of the main reason why they are slowly, steadily, but for a longer term and with a defined quantity.
Govindraj Ethiraj: How are things looking on the retail side? I mean, in India too now we are obviously seeing prices inching towards 90,000 rupees for 10 grammes. Is that likely to continue?
As of now, what are the kind of signals you're seeing?
Jigar Pandit: Basically, although we are the biggest consumer in gold, but we are still a price taker and not a price giver. So basically we don't dictate the price in the international market. It's basically the international prices which dictates us.
If the international prices goes up by 10%, definitely in Indian market also the prices will go up by 10%. Assuming the USDNR is at same level and the custom duty is same. So if the international price goes up, definitely in India will go up.
And looking at the retail, yes. So if you talk about, I think 2024, early 24, there was a heavy premium in gold ETF in China, right? Because the reason was China market was not doing good, economy was not doing good, and definitely money was chasing gold.
There was a very big premium in ETF. So it's the case now, people are definitely watching at the US data, US inflation, how it is, you know, turning up. And based on that, how the interest rate cut will come.
So at the start of the or at the end of the 2024, market was expecting there would be hardly any rate cut for 2025. But now market is expecting that in 2025, definitely there would be two rate cuts. So that anticipation price is going up.
Third point, because of this tariff war, US traders are expecting that there would be a definitely tariff impact on gold. And hence, if you have, I mean, we have seen in last few days or few weeks, there's a heavy import by US from Switzerland. And in fact, New York market is at premium of the LBMA market.
And the reason is very simple, traders in the US market, they need a physical delivery. And they're anticipating that if the tariff war starts, that definitely there would be a big tariff or the duty or the gold import. And hence with that, they are, you know, taking a physical delivery.
Govindraj Ethiraj: And what does all of this add up to both the retail trends as well as the institutional trends to how the prices could move to the extent that we can project or predict in the next month or so?
Jigar Pandit: By next month, definitely the way it is going right now, it is trading at $2,910 odd dollars. So if the same way it continues, definitely we see anywhere between $95,000, $94,000, $96,000.
Govindraj Ethiraj: Thank you so much for joining me.
Trump Tariff Tracker
U.S. President Donald Trump said on Sunday he will introduce new 25% tariffs on all steel and aluminum imports into the U.S., on top of existing metals duties on Monday.
He also said he will announce reciprocal tariffs on Tuesday or Wednesday, to take effect almost immediately, applying them to all countries and matching the tariff rates levied by each country.
Meanwhile, it has taken less than a month for the second Trump administration to cool the enthusiasm of chief executives and dealmakers, the WSJ is saying.
The recent whipsaw on tariffs seemed to hit hardest on business leaders’ confidence, the WSJ said.
A number of executives, as well as top investment bankers and other industry advisers, have said that priorities have shifted in recent days to navigating tariffs and other policy issues.
They need to settle supply routes, discuss whether to raise their own prices and figure out what is even happening. That doesn’t leave much room for thinking about big bet-the-company deals.
The reaction is evident in the deals market. Just under 900 deals were announced in the U.S. in January, according to data from LSEG. That compares with more than 1,200 transactions in the previous January and over 1,500 two years ago.
Even the hope of a lighter regulatory touch has taken a knock. The Justice Department sued to block Hewlett Packard Enterprise’s $14 billion deal to buy Juniper Networks.
LNG Purchases
India will launch rounds for oil and gas blocks licensing this week, India’s oil minister Hardeep S Puri said on Monday.
Puri said that he hopes energy supply issues will be discussed during the meeting between Indian Prime Minister Narendra Modi and U.S. President Donald Trump, scheduled for later this week.
"I will be surprised if sourcing of energy will not figure during the discussion," Puri added according to a Reuters report.
Meanwhile, India’s top importers of liquefied natural gas are holding talks to buy more fuel from US suppliers, ahead of Prime Minister Narendra Modi’s expected meeting with President Donald Trump in Washington this week, Bloomberg reported.
Indian Oil Corp., Bharat Petroleum Corp Ltd and Gail India Ltd. are considering purchases, India’s Oil Secretary Pankaj Jain told reporters in New Delhi on Monday, adding some companies could also be open to buying shares in US LNG projects.
“We are talking with the US on both crude and LNG, but LNG is a bigger priority than crude,” Jain said.
Indian buyers including Indian Oil were in discussions to buy LNG on a long-term basis from US export giant Cheniere Energy Inc. and other companies with access to American supply.
Gail India Ltd. is also considering investing in a US project, some of the people said.
Buyers will hold meetings over the next few days as energy producers and purchasers gather for the India Energy Week conference in Delhi.
Japan’s prime minister Shigeru Ishiba, who, in a meeting last week, pledged to buy more LNG from the US in order to reduce its trade surplus.
Indian officials have said the Prime Minister is prepared to discuss reducing import tariffs and buying more defense equipment as well as energy.
The US is the world’s top exporter of LNG, while Indian demand for the power plant and industrial fuel is set to rise through the decade as the nation seeks to curb dependence on dirtier options.
Bloomberg also says any new deals likely wouldn’t start until later this decade, as there is little spare supply available now.
