Renewed volatility in global trade policy is prompting investors to reassess their strategies, with a growing emphasis on domestic growth opportunities rather than export-reliant businesses. The shift comes as tariff levels stabilize around 15%, but uncertainty surrounding future policy decisions persists, creating a challenging environment for international trade.
Market strategist Manishi Raychaudhuri, speaking to ET Now, highlighted the difficulty in drawing definitive conclusions given the “sheer volume of conflicting headlines.” He noted that a previously settled tariff landscape has experienced a resurgence of instability, eroding India’s competitive advantage over its ASEAN counterparts and fostering “chaos and uncertainty” in the short term. , Raychaudhuri advised prioritizing investments aligned with India’s internal economic expansion.
This recalibration suggests a move away from companies heavily dependent on overseas markets. Raychaudhuri specifically recommended avoiding exporters in favor of sectors demonstrating robust domestic demand and reasonable valuations. He identified basic materials, select industrials, and consumer discretionary segments as areas offering potential, while stressing the importance of careful stock selection. Companies like Tata Steel, Hindustan Zinc, and Larsen & Toubro were cited as examples of businesses benefiting from these domestic cyclical trends.
The caution extends to traditionally defensive sectors. Raychaudhuri flagged consumer staples as an area of concern, citing low growth despite relatively high valuations. This suggests investors may be overpaying for limited expansion potential in this segment. Similarly, he expressed reservations about the IT services sector, pointing to mounting pricing pressure driven by the increasing influence of artificial intelligence. He argued that AI is altering how clients assess the value of IT contracts, potentially leading to margin compression for service providers.
Raychaudhuri indicated that IT stocks might only become attractive at valuations closer to 10-12 times earnings, implying a potential downside or a prolonged period of stagnation for many companies in the sector. While acknowledging that some technology firms could differentiate themselves, he emphasized the need for a demonstrable ability to adapt and innovate – potentially through strategic partnerships, such as Infosys’ collaboration with AI specialists – before considering investment. However, he cautioned that concrete evidence of growth or margin improvement would be required before allocating capital.
The shift in investor sentiment is also influenced by the relative attractiveness of other Asian markets. Raychaudhuri observed that global investors are currently finding more compelling opportunities elsewhere in Asia, where earnings growth is stronger and valuations are lower. This suggests that a sustained return of foreign institutional investment to India may be contingent on narrowing the gap in these key metrics. The current environment, presents a challenge for attracting and retaining foreign capital.
The resurgence of tariff concerns stems from a reversal of earlier positive signals. After a period of easing trade tensions, uncertainties have re-emerged, particularly with the postponement of trade discussions between India and the United States and the initiation of new US trade investigations involving other countries. While markets initially reacted favorably to a reduction in the headline tariff rate from 18% to 15%, Raychaudhuri cautioned that the broader picture remains unclear.
He pointed out that India had previously enjoyed a slight tariff advantage over certain ASEAN nations in sectors like textiles and aquatic products. However, with tariff rates now converging, this advantage has largely dissipated. This leveling of the playing field intensifies competition and adds to the overall uncertainty for Indian exporters.
The implications of this evolving trade landscape extend beyond individual companies and sectors. A sustained focus on domestic growth could reshape investment patterns, potentially driving capital towards infrastructure projects, manufacturing, and consumer-facing businesses within India. However, the reliance on internal demand also carries risks, particularly if economic growth slows or consumer spending weakens. The ability of Indian businesses to adapt to these changing dynamics and capitalize on domestic opportunities will be crucial in navigating the current period of trade policy volatility.
The current situation underscores the importance of valuation discipline for investors. As Raychaudhuri emphasized, focusing on areas where growth aligns with reasonable valuations is paramount in an environment characterized by uncertainty and shifting trade dynamics. A selective approach, prioritizing companies with strong domestic fundamentals and avoiding overvalued sectors, is likely to be the most prudent strategy in the near term.
