US' Tariff Hikes Expected To Shift Concerns From Inflation To Growth: Nuvama
Certain sectors, such as gold, minerals not found in the US, semiconductors, and pharmaceuticals, have been exempted from these reciprocal tariffs.
The impact of US tariff will unfold in two stages: an initial inflation scare, followed by a growth scare. The large tariff hikes, coupled with a slowing US consumer market, are expected to shift concerns from inflation to growth, said Nuvama in its analysis.
This shift is already evident, as US Treasury yields have dropped following the announcement, indicating rising growth concerns, it said.
In a significant move, President Donald Trump announced a series of wide-ranging tariff measures during his "Liberation Day" speech, escalating the global trade war.
The United States has imposed a 10% baseline tariff across the board, a substantial increase from the current 2-3%. Additionally, reciprocal tariffs ranging from 10-50% have been introduced for different countries, with China facing the highest hike at 54%, followed by Vietnam at 46%. For India, the tariff has been raised to 26%, a significant increase that could have far-reaching consequences.
US officials have stated that the baseline tariff of 10% will be effective from April 5, while reciprocal tariffs may come into effect from April 9. Certain sectors, such as gold, minerals not found in the US, semiconductors, and pharmaceuticals, have been exempted from these reciprocal tariffs. Additionally, cars and car parts, already subjected to a 25% tariff, will not face further increases.
For India, the impact of these tariffs is significant, given that goods exports to the US amount to $80 billion, representing 18% of India's total goods exports and 2% of its GDP, said Nuvama.
Key export sectors to the US include machinery, electronics, textiles, gems and jewellery, agriculture, and pharmaceuticals. While it remains unclear if some of these goods will be exempted from tariffs, the broader impact of a global slowdown and changes in capital flows are expected to be more pronounced. India's economic cycle is closely linked to the global trade cycle, making it vulnerable to these shifts.
Nuvama warns that while the direct impact of tariffs on India may be limited, the indirect effects are substantial. Weak global growth is likely to weigh on India's exports, affecting topline growth. With two-thirds of India's topline linked to global growth, weak exports could hinder demand revival, especially as margin expansion levers are exhausted. Consequently, earnings cut risks loom large.
Valuations, although eased to the 10-year average, remain expensive relative to growth and interest rates. The earnings yield minus bond yield, a key indicator of market inflection points, suggests further downside ahead, it said.
In light of these developments, Nuvama recommends a defensive portfolio allocation. Investors should position for a global risk-off scenario, favoring cyclicals with reasonable valuations and low margins (such as private banks and insurance), defensive cash proxies (consumer, telecom, pharma), and cyclicals with depressed margins (cement, chemicals, QSR). Conversely, it advises underweight positions in cyclicals (industrials, metals, PSUs) and has recently downgraded IT due to high relative valuations.
