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The imposition of tariffs by former US President Donald Trump has introduced a degree of uncertainty and volatility into the Indian stock market. While the immediate reaction has been a sell-off by Foreign Institutional Investors (FIIs), the long-term consequences for Indian equities are expected to be limited, primarily because India is not an export-oriented economy to the same extent as other nations. This insulation is further strengthened by the diversification of India's export markets, with the United States accounting for a relatively small proportion of its total exports, estimated at less than 2% of India's GDP. However, the effects of these tariffs will not be uniform across all sectors of the Indian economy, with some industries being more vulnerable than others. Sectors that are largely driven by domestic demand, such as FMCG (Fast-Moving Consumer Goods), retail services, banking, financials, infrastructure, and utilities, are expected to be relatively insulated from the direct impact of the tariffs. These sectors rely primarily on the Indian consumer base and are therefore less susceptible to fluctuations in global trade dynamics. On the other hand, sectors that are heavily reliant on exports, particularly to the United States, such as IT services, pharmaceuticals, and textiles, are likely to experience some headwinds in the near term. These sectors face the risk of reduced demand from the US market, which could lead to earnings volatility and potentially impact their overall performance. Market experts suggest that the tariffs and any subsequent market corrections could present a favorable entry point for retail investors looking to allocate funds to equities over the long term. History has shown that tariff-driven disruptions typically have a temporary impact on markets, and over the long run, fundamentals and corporate earnings are the key drivers of equity performance. Therefore, investors are advised to remain invested in their existing portfolios and avoid making hasty decisions based on short-term market fluctuations. Instead, they should consider deploying surplus funds gradually in a staggered manner, aligning their investments with their long-term financial goals. This disciplined approach helps to smooth out volatility and ensures participation in long-term wealth creation, regardless of geopolitical noise or external shocks. Furthermore, investors are encouraged to build an all-weather portfolio with a diversified mix of asset classes, including both equity and debt, and to rebalance their portfolios periodically to maintain their desired asset allocation. For long-term goals, a common recommendation is to maintain an 80:20 equity-to-debt mix, while for medium-term goals, a 70:30 mix may be more appropriate. The use of Systematic Investment Plans (SIPs) or Systematic Transfer Plans (STPs) is also recommended as a means of avoiding the pitfalls of trying to time policy cycles and market fluctuations.
Mutual funds (MFs) can serve as a valuable tool for investors seeking to navigate the uncertainty caused by the tariffs. A diversified investment basket, allocated across various active diversified equity categories such as market-cap-based funds and strategy-based funds like dividend yield, value, and contra funds, can help mitigate the concentration risk associated with the performance of any single category. This broad-based exposure also ensures participation across sectors and styles, enabling investors to ride through market cycles more comfortably and reducing the impact of short-term policy-driven disruptions like tariffs. Within this framework, investors can utilize market-cap categories like Large Cap, Mid Cap, Small Cap, Flexi Cap, and Multi Cap, complemented by style funds such as Value and Contra, to balance factor cycles and create a blended style portfolio. While tariffs themselves do not directly target market caps, export-oriented companies within the mid-cap and small-cap segments may face temporary earnings pressure. However, these impacts are typically company-specific and tend to normalize over time. A greater concern in this sector is the high price-to-earnings (P/E) ratios of many stocks, with a significant number of stocks trading at levels that are difficult to justify from a fundamental perspective. While high P/E ratios may be acceptable for stocks with sustained long-term growth potential, this is not the case across the entire mid- and small-cap universe. Therefore, investors are advised to adopt a strategic market-cap allocation, such as a 55:25:20 split across Large, Mid, and Small caps, to reduce volatility and improve portfolio stability and liquidity, with periodic rebalancing to maintain the desired allocation. Overall, the Indian economy is poised for strong and sustainable growth, with GDP expected to expand at a healthy pace in the coming years. This provides a favorable environment for Indian equities, supported by robust corporate earnings, government reforms, and demographic tailwinds. For investors, remaining invested in domestic equities through a diversified basket of funds offers a strong opportunity to participate in the long-term growth story.
Fitch Ratings, in a report, assessed that India-based corporates generally have low direct exposure to US tariffs, although sectors currently unaffected, such as pharmaceuticals, could be impacted by future tariff announcements. The risk of second-order effects from existing tariffs is also increasing. A potential US-India trade deal would mitigate these risks. The US has imposed tariffs on India in response to various issues, including India's oil imports from Russia. India's direct automotive exports to the US are limited, but the US is a significant export destination for Indian pharmaceutical companies. Fitch assumes minimal direct tariff impact on Indian IT service companies and domestically focused sectors such as oil and gas, cement, construction, telecoms, and utilities. However, if US tariffs are sustained at significantly higher levels than in other Asian markets, there could be downside risks to the economic growth projection. This would negatively affect the operating performance of more Indian companies. In summary, while Trump's tariffs have introduced some uncertainty into the Indian stock market, their long-term impact is expected to be limited due to India's relatively low export dependence on the US and the diversification of its export markets. Investors are advised to remain invested in their existing portfolios, consider deploying surplus funds gradually, and maintain a diversified asset allocation. Mutual funds can be a valuable tool for navigating the uncertainty caused by the tariffs. However, investors should carefully consider the valuations of individual stocks, particularly in the mid- and small-cap segments, and adopt a strategic market-cap allocation to reduce volatility and improve portfolio stability. The Indian economy is expected to continue to grow at a healthy pace, providing a favorable environment for Indian equities over the long term.
Source: Trump tariff impact: A short-term blip or a long-term pain for Indian stock market? Explained