Talking Point This Week — Tarrified? Not Quite!

US President Donald Trump imposed a 25% tariff on Indian goods, effective from Aug. 7, with an additional 25% penalty for India's continued purchase of Russian oil, bringing the total tariff to 50% if a trade deal is not reached by Aug. 27. This move, aimed at addressing a $45.8 billion US trade deficit with India and criticising its high tariffs and Russian trade ties, has strained bilateral relations, prompting India to call the tariffs "unfair, unjustified, and unreasonable" while vowing to protect its national interests. The tariffs threaten sectors like textiles, chemicals, and auto ancillaries, with a potential 0.6-0.8% downside risk to India’s GDP growth. More importantly, they are poised to upend painstakingly crafted relationships with high camaraderie between two nations. That and weak results dominated the investing landscape of talking points this week.

The proposed US tariffs could significantly impact India's textiles, chemicals, and auto ancillary sectors, with companies like Gokaldas, Aarti, and Sona BLW facing risks due to direct US export exposure, while pharmaceutical and EMS may remain unaffected, though an Apple announcement could dampen EMS sentiment. A linear model estimates a 0.6-0.8 percentage point downside risk to India's annual growth, but the actual impact could be higher as exports may become unviable, potentially straining current and capital account flows and pressuring the currency market. If India reduces Russian crude imports as part of a settlement, Reliance and OMCs could face vulnerabilities, and crude price spikes may follow. The Reserve Bank of India might intervene to mitigate sharp currency depreciation, but uncertainty around the final outcome could weigh on market sentiment in the near term. Looking at the equity reaction on Thursday though, you could be forgiven for thinking that the tariffs don't matter much.

HSBC believes that there are pockets of strength to watch out for, despite tariff stress. Their latest strategy note talks of five stocks that shine despite their sectors facing headwinds. Trent stands out in the fashion retail sector with a compelling growth story driven by Zudio's rapid store expansion, outpacing its peers in a highly competitive market. Infosys has outperformed its peers in the IT sector, expected to continue doing so incrementally, with valuations becoming less of a concern and rupee weakness providing some support. Godrej Consumer Products Ltd. excels due to its innovation capabilities, gaining market share in the home insecticides business. State Bank of India is better positioned than large private banks, boasting strong balance sheet liquidity and stability. Phoenix Mills is poised to benefit from refreshing its legacy malls, with its stock offering attractive valuations after a recent correction.

Following the implementation of Trump's sweeping new tariffs on Aug. 7, which impose duties ranging from 10% to 50% on imports from nearly 70 countries including India and Brazil, to address trade imbalances and deter support for Russia's economy through oil imports, global attention has turned to a series of high-stakes geopolitical meetings as affected nations scramble to forge alliances and countermeasures. Brazil's President Luiz Inácio Lula da Silva has sharply condemned the tariffs, rejecting direct negotiations with Trump as "humiliation" and instead planning a joint statement with Indian Prime Minister Narendra Modi and other BRICS leaders, while pursuing consultations at the World Trade Organisation to challenge the measures. Amid these tensions, potential bilateral talks between Modi and Russian President Vladimir Putin are anticipated, with Putin likely visiting India in late August following discussions by India's National Security Advisor Ajit Doval in Moscow, signaling deepened Indo-Russian ties to counter U.S. pressures. Adding to the diplomatic momentum, Modi is scheduled to visit Japan on Aug. 30 for a summit with Prime Minister Shigeru Ishiba to advance cooperation on infrastructure like bullet trains, before heading to China for the Shanghai Cooperation Organisation (SCO) Summit in Tianjin from Aug. 31 to Sept. 1—his first trip there in seven years—where he may engage with Chinese President Xi Jinping and possibly Putin on regional security and trade amid the broader US-led economic standoff. Prepare for a heavy August ending.

Should we talk about the calm disrupted for even very calm nations? I am talking about Switzerland, which has been hit with 39% tariffs from the US. Why is this important? The EU stands as Switzerland's most crucial trading partner, enjoying a largely tariff-free relationship punctuated by a few exceptions. This unique dynamic positions the EU as the sole market capable of mitigating the repercussions of US tariffs on Switzerland's export-driven economy. Consider this - companies such as Ypsomed, a medical device manufacturer, are already feeling the strain, with plans underway to relocate some production to Germany to alleviate the pressure, as per an article in Reuters. Should this trend continue, Switzerland's historically low unemployment rates might climb, potentially influencing voters to adopt a more EU-friendly stance, not the first port of call for the country. Think about it - the unsettling impact of Trump's aggressive tariffs on Switzerland's traditionally calm and predictable economic landscape cannot be overstated!

International Aerospace Manufacturing Pvt., a joint venture between Hindustan Aeronautics and Rolls-Royce, chose to establish a large factory complex to expand production of jet turbines and other aerospace parts for civilian and defense aircraft in Hosur. A major reason for choosing Hosur was the ease with which the Tamil Nadu government cleared the path. According to the CEO of the business, India’s complex property ownership laws make securing land one of the toughest obstacles, which officials asserted that they would handle with minimal fuss. This is exactly what the Vinfass CEO told me in a conversation earlier in the week. Maybe there is a thing or two for other states to learn from the southern states?

As we wrap up, we talk about a serious problem plaguing almost all nations. As per a Bloomberg article, across the world, access to clean running water has long been considered a key marker of economic advancement. Yet in several of the most prosperous cities in the richest nation on Earth, the share of households living without that critical service is climbing. About 72% of US households lacking running water live in metropolitan areas. For example, the number of households without running water in Portland increased 56% from 2000 to 2021! Think about that, and thank your stars if you are sipping on water from your running tap!

Have a great weekend everyone!