Talking Point This Week: Trade Tensions, Tariff Jitters Dictate Newsflow

This week was marked by trade tensions and tariff newsflow, with barbs being exchanged between the US and Brazil. Dollar was steady, but Bitcoin surged to levels not seen before. There were other news, including results flow in India as well as corporate developments. In corporate news, Delta Air Lines soared on strong quarterly results and a raised outlook, while WK Kellogg's shares jumped on reports of a $3 billion acquisition by Ferrero Group. Meanwhile, the EU is urgently seeking a trade deal with the US to avert further tariffs, and the UAE was formally removed from the EU's high-risk list for money laundering.

Here are the key talking points this week:

Trade Tensions The Biggest Event

Global trade tensions just got a whole lot worse! The US is leading the charge with a slew of new tariff announcements that are sparking outrage worldwide. Canada's getting slammed with a 35% tariff on a bunch of imports, effective Aug. 1, because the US claims they're not doing enough to stop fentanyl trafficking. And that's not all - over 20 other countries are in the crosshairs, with tariffs ranging from 15% to 20%. Brazil's getting hit with a whopping 50% tariff, and copper imports are facing a 50% tariff. The US is also threatening a 200% tariff on pharma imports if companies don't move production to the US. This is all about "reciprocal tariffs," but it feels like a full-on trade war. Affected countries are already vowing to fight back and protect their workers, naturally so.

Expert Opinion

S Naren's insight that "every stock is discovered" reflects India's maturing stock market, where intense competition among brilliant stock pickers has left few undervalued opportunities, pushing investors toward contrarian picks in hated sectors like oil and gas, supported by a 2023 study from the National Bureau of Economic Research showing market efficiency increases with analyst density. The shift from value to momentum investing in a late-cycle economy aligns with historical patterns; a 2021 Journal of Finance study found momentum strategies outperform value strategies by 6% annually in late economic cycles, a trend potentially amplified by India's current earnings revisions and strong domestic flows. Conversation with Sajjid Chinoy and Chetan Ahya suggest that Asia will have to brace for a slowdown, and that may make it difficult for higher growth countries like India to deliver growth too. The lone ranger was JP Morgan's Rajiv Batra, whose note suggests that this quarter will serve as a transition from underwhelming earnings to a decent recovery, driven by the low base from the previous year and a resurgence in economic momentum. Batra expects the Nifty to trade at a level between 26,500-30,000 in the next 6-9 months.

When It Rains, It Pours

The week had a lopsided newsflow, with the second half standing true to the adage that 'when it rains, it pours'. TCS beat earnings expectations with a better than expected delivery in net profit, but a sluggish revenue growth and a wobble around demand. CEO K Krithivasan is optimistic about new services and deal wins, despite global economic uncertainty. And this weighed in on the stock price, with the IT index coming off for three days on a trot. Meanwhile, Hindustan Unilever is shaking things up with Priya Nair set to become the first female CEO and MD in the company's 92-year history. And Glenmark Pharmaceuticals is celebrating a massive $2 billion deal with AbbVie for its cancer treatment, with a cool $700 million upfront payment. The stock has gained 25% this month, with a 15% move coming in post the announcement.

Assumptions Of Dollar Dominance Forever, Are Shaky

The past 25 years has seen the UK, France and US issue far too much debt, which Asian countries stacked up in their foreign exchange reserves out of fear for a new Asian crisis. The next question is whether this imbalance can endure. And, if not, how will it be resolved. The answer to the first question is increasingly obvious: Asian countries are becoming ever less fond of US treasuries, gilts and OATs.  So what happens next? History shows that such imbalances usually spur an important shift in the value of exchange rates. The country that has issued too many bonds sees its currency fall, while the one that has saved too much sees its currency re-rate. Imagine what will happen to the dollar ahead!

Lastly, a (not so) personal question. Fed up with your paycheck? How does $200 million-plus sound? As per a Bloomberg article, that’s what Meta is apparently paying Ruoming Pang, who used to run Apple’s AI models team. More importantly, it is in line with the compensation of other members of Meta’s new “superintelligence” group. Why is this happening? Well, we know AI is all pervasive. But there are minds like Eric Schmidt who believe that the AI revolution is 'underhyped'. If this is an indication that you are assuming that it is overhyped, maybe you should rethink your estimates or assumptions. Have a great weekend.

Until Next Time...

Niraj Shah