R. Janakiraman*, CIO – Franklin Equity
Financial markets are increasingly factoring in a potential global growth slowdown, with declines being observed in benchmark indices across the US and most non-European regions. In March 2025, the US dollar has mostly erased its gains since mid- November 2024, impacted by uncertainties in US trade policy and economic growth. Evolving geopolitical tensions may further complicate matters.
The US has imposed a broad 26% tariff on exports from India, effective midnight on April 9. While the direct impact of tariffs on India is limited, there could be cascading effects due to similar tariffs imposed on other countries. Further, India's trade deal with the US should set it apart amid the ongoing trade upheaval.
India can be expected to be better positioned in the current environment for the following reasons:
• The direct economic drag from tariffs is likely to be limited, given the domestic nature of India's growth drivers.
• IT and services exports (including Global Capability Centres) are directly unaffected by reciprocal tariffs. Indirect impact on IT sector could be meaningful though.
• Export sectors such as electronics manufacturing services (EMS) are comparatively better off than peers in China or Vietnam.
• India has shown a willingness to negotiate as it reduced tariffs on US imports and ramped up energy purchases, signalling intent to improve trade ties.
However, risk persists, especially from second order effects like:
• A broader slowdown in global growth and a weakening investment cycle due to policy uncertainty.
• Escalation risk remains as other countries may retaliate against the US tariffs, leading to a wider trade conflict.
• The 'risk-off' sentiment in US equities has spilled over to other global markets including India.
Earnings risk is rising - If the tariffs persist, a weakened US economy would weigh on sectors like IT services and other exporters. While 4QFY25 is expected to be another weak quarter for earnings, we believe the market will begin to factor in growth for FY26, which may benefit from the low base of FY25. Consensus projections indicate earnings growth of approximately 13% for FY26. However, markets are still wary of potential downgrades, similar to those experienced in FY25. Increased confidence in these estimates could help stabilize the markets.
The uncertainty in business climate can impact revival in private capex cycle which the markets have been expecting. This could weigh on economic growth and the near term would be volatile.
Market valuations have corrected as Indian equity markets have underperformed over the past six months. Large cap valuations now look attractive while mid and small cap segments remain higher than long term averages.
While the near term will be volatile, we continue to emphasize the importance of equities as a long-term asset class. Volatility is not inherently negative for long term investors and it presents an opportunity.
Opportunities for investors
Given current global uncertainties and market dispersion, a diversified approach is prudent. Exposure across market capitalizations and sectors can help manage risks and capture opportunities. Hybrid funds may offer optimum risk adjusted returns during uncertain times. The current phase requires discipline and patience, not a shift away from equities.
Source: Bloomberg, RBI, MOSPI, Morgan Stanley
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