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Informist, Monday, Apr. 7, 2025

 

By Anshul Choudhary

 

MUMBAI – Analysts are bracing for extreme volatility in equity markets and a possibility of a further correction in stocks as the market is still assessing the extent of impact of the reciprocal tariffs announced by the US last week. Investors are worried about the larger implication of tariffs by the US, which could lead to a trade war among countries, hurt economic growth in major economies, and even push the US itself into recession, analysts said.

 

Analysts said the market's movement after the steep fall Monday would depend on how long these tariff last before countries manage to sign trade deals with the US. "No one knows the exact impact these tariffs can have on economies. We are yet to see how other countries will react (to tariffs). We are yet to see how does this impact prices and how US consumers react to high prices," Dharmesh Kant, head of equity research at Cholamandalam Securities, said. "These negative sentiment could push market (Nifty 50) down by 1,000-1,500 points more."

 

Monday, The Nifty 50 slumped 5% but then recovered to end over 3% down to close at 22161.60 points as investors rushed to take money out from equities to protect themselves from the fallout of the tariffs. The Nifty 50 is now down nearly 16% from its lifetime high--touched in September last year--and another 1,000-point fall would mean a decline of 5%, pushing the Nifty 50 dangerously close to a bear market.

 

Analysts are unsure if it would be possible to get a clarity on the impact of tariffs in the near term as trade deals may take several months to finalise. There is a worry if trade deals take time, tariffs could lead to a spike in inflation in the US and hurt demand for products consumed in the US. This could create havoc for businesses dependent on the US and may affect economic growth globally, analysts said.

 

The tariff announcement has already led to a few economists cutting their growth estimates for India. Economists at Goldman Sachs last week lowered their GDP growth forecast for India by 30 basis points to 6.1% for 2025. Such a slowdown in India, and globally, could trigger earnings downgrades, analysts said.

 

"If EPS (earnings per share) contraction starts then more than 10% correction in Nifty and a below (or around) 20,000 level is triggered so watch this and upcoming earnings carefully," Manish Jain, chief strategy officer and director at Mirae Asset Capital Markets, said in a note. "In a challenging environment, we have observed earnings cut by up to 30% and till date we have seen earnings cut by 7%/2% for CY25 and CY26 (Bloomberg) from Sep-24." 

 

Information technology companies, which earn a large part of their revenue from the US, are at the biggest risk of downgrades if there is a slowdown in growth in the US. Analysts said tariffs are likely to hurt discrentionary spending in the US and considering this, earnings estimates of technology companies may see a cut as these had already factored in a recovery in demand in the US during this financial year. 

 

Investors have sold information technology stocks recently due to a risk of downgrades and the Nifty IT index is down 10% since the US announced reciprocal tariffs. The sectoral index is now down nearly 30% from its lifetime high touched in December last year, but analysts advised against buying technology stocks just yet. "Despite the fall in IT stocks, they are still trading at one year forward P/E valuations which are 15% higher than pre-COVID and hence investors should be underweight IT," Ashutosh Tiwari, head of institutional equities at Equirus Capital, said in a note.

 

Apart from this, metal companies are expected to face the brunt of tariffs due to lower demand if global growth slows down, even though Indian metal companies do not have a significant exposure to the US. Analysts are worried that Asian countries, such as China, would dump cheap steel and aluminium products in India as they are now facing high tariffs from the US and may look for options to sell their products. Analysts are worried that similar dumping could occur in the chemical sector as well, which has already been struggling due to weak demand in global markets.

 

While global risks have led to selling in stocks in the past three sessions, the slowdown in domestic earnings also played its part in keeping bullish sentiments in check. Earnings growth for the Nifty 50 companies has been poor for three quarters now and the March quarter is unlikely to show any sharp growth in earnings. Last week, Nuvama Institutional Equities said it expects the Nifty 50's earnings per share to grow a mere 2% in the March quarter, and this could trigger further downgrades. Even before the tariffs were announced, analysts were expecting some earnings downgrades due to a delay in recovery in domestic earnings growth.

OPPORTUNITY IN VOLATILITY

While tariffs have been deterimental for equity markets globally, Indian markets have managed to see a limited sell-off when compared to markets in the US, Asia, and Europe. Since the announcement of tariffs, major indices in the US have fallen 9-11%, those in Europe 11-15%, and those in Asian region 7-15%. The Nifty 50, on other hand, has fallen only 5% since the tariff announcement.

 

Analysts said Indian markets have shown some resilence in the face of sweeping tariffs due to limited exposure to the US. India's exports to the US in 2023-24 (Apr-Mar) were slightly more than 2% of GDP, according to a report by Emkay Global Financial Services.

 

This has raised hopes that the market may not see any major fall from here and could even post a sharp recovery once clarity emerges over tariffs. IDBI Capital Markets & Securities' head of equity research, Pravin Bokade, said the Nifty 50 may settle around 22500 points in the coming days once the initial volatility subsides.

 

Several analysts said they don't expect any major fall from current levels as they hope a trade deal with the US will materialise soon. India has already begun talks with the US over tariffs and the two countries are expected to reach a trade deal in the coming months. Analysts said India may offer to cut tariffs on imported electric vehicles, electronics, among others, to get concession on reciprocal tariffs.

 

While tariffs are expected to remain for some time, market watchers said there is a silver lining as higher tariffs on other Asian countries such as China, Vietnam, and Bangladesh may open opportunities for Indian companies. Electronics and textile industries are expected to benefit from this shift, analysts said. 

 

Apart from this, the recent fall in inflation and a slowdown in economic growth is likely to push the Reserve Bank of India to cut interest rates this year with some analysts expecting interest rates to come down to 5.5% this year from the high of 6.5% just two months ago. The RBI's is set to announce its next monetary policy decision Wednesday, where it is widely expected to cut the repo rate by 25 basis points to 6.00%.

 

Analysts said a fall in inflation, lower interest rates, and the income tax relief for individuals announced in the Union Budget are likley to aid earnings growth this financial year, which could also limit the fall in markets. "For investors, panic-selling now would be a mistake...A market rebound is likely in two to three quarters once the tariff uncertainty settles and the US rate cycle stabilises," Jaspreet Singh Arora, chief investment officer at Equentis Wealth Advisory Services, said in a note.  End

 

Edited by Akul Nishant Akhoury

 

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