Get Your Hands Bloody

A Swan Like No Other

Only one human being on this planet can reduce the wealth of his own citizens by 5 trillion dollars with one announcement. Donald Trump did exactly that last week, when he made the tariff declarations of a century, and slammed US equity markets into bear territory.

Nobody loves hyperbole as much as President Trump, so even if he had not anticipated the extent of the damage he was doing to US equity markets, there must be a part of his substantial ego relishing the scale of the impact he has had on the world. It’s more than possible that his opening salvo of ICBMs will be followed by several local skirmishes, aka trade negotiations, that will partly reverse the bruising tariffs. In the absence of such reversals, the new slate of US import duties will lead to a world with much less trade. Ergo, a world with diminished prosperity for some, and enhanced poverty for many.

Indian investors can draw consolation from the fact that our Nifty has lost ‘only’ 16% from its peak, while the Nasdaq is down 20%. But Monday is another day, and we could get swept into a global contagion of market despondency. At times like these, most investors fall into one of two modes - freeze like a rabbit caught in the headlights, or sell everything in a panic. I’ve adopted both modes of behaviour in earlier waves of global downturn. Neither is optimal. Optimal is Warren Buffett, whose premonitory genius had Berkshire Hathaway liquidate assets and stuff its war chest with over 300 billion dollars in cash, which it may well have begun to deploy, now that blood is on the streets.

Since I didn’t have that kind of foresight, my net worth is badly bruised, and the default avoidance mechanism would be to stop looking at my equity holdings till the pain passes. I’ve been there before - in 2001, and in 2008. Avoidance is self-indulgent, and thoroughly unproductive. Every crisis throws up buying opportunities, but they will be most rewarding when the blood is fresh, not after the scabs have healed. If you buy now, you might see some more downside; but if you wait too long, sharp recoveries can paralyse you into a long period of inaction.

This time around, I am determined to retain the behavioural edge of an equity investor, actively looking for attractively priced stocks even while the indices are getting shoved around. I don’t yet have a list of stocks to buy; even if I did, making recommendations on social media is fraught with consequences. I will use the next few paragraphs to try and think through my stance towards Indian equity markets over the coming days and weeks.

First the broad picture. Despite 10 years of Make in India, we are not a big exporter of manufactured goods, especially to the US. Our global exports of goods and services run to 775 bn. USD a year. Of this, merchandise exports to the US are about 125 bn. USD a year, 16% of our total annual exports. Of this, pharmaceutical exports, of about 6 bn., are exempt from the Trumpian edicts, as are services exports. Trump’s new tariffs will impact about 15% of Indian exports, which, in turn, are a little over 3% of our GDP. This is not massive, if you exclude what economists called ‘second-order impact’, the ripple effect of economic disturbances in an inter-connected world.

Financial ripples spread much more rapidly than economic ripples, and this could create opportunities for stock-pickers: if there are massive drops in equity prices due to forced selling and margin calls on brokers, stock prices could fall below fair value (whatever you

reckon those to be), even if the underlying businesses are not deeply affected by global trade. It is these I hope to find.

The first two areas in which I will look for value picks are Indian agriculture and consumer lending.

Why agriculture? Well, our policy makers realise that the Make In India story has run out of both road and narrative, that infrastructure spending has its limits (including fiscal), and that consumption is not going to pick up unless incomes do. In two quiet policy moves, I see a shift towards boosting agricultural incomes - the first is in allowing a huge spike in the price of imported edible oils, which will encourage domestic production; the other, similarly, is allowing open market prices in wheat to rise, despite FCI holdings of wheat. With over half of our population living on the land, and limited prospects of employment in the cities, higher agricultural income is the metric most likely to yield returns to governmental policy. I’m going to be looking at interesting stories in agricultural inputs (fertilisers and chemicals), food processing and agri-marketing.

The second is consumer lending. As household debt has risen, RBI has been signalling caution in this area, and more than a few businesses have gotten into trouble with burgeoning bad debt. But the underlying drivers are strong: our propensity to consume has increased, and borrowing money, whether against gold, home mortgages or credit cards, has become increasingly normalised. Lenders who can measure and manage the risk of lending to households will have a good run, quite insulated from trade turmoil. This turmoil, and the attendant fear of recession has led to a sharp drop in US treasury yields. If this is sustained, it will lead to cheaper lending rates across the world, making it easier for our finance companies to expand their lending books.

Aside from lower bond yields in the US, the other sharp change last week was in the price of crude oil. Brent crude oil has dropped below 70 dollars a barrel for the first time since December 2021. If the weakness sustains, it will be a significant boost for the Indian economy. Imports account for about 88% of our crude consumption, and gobble over 125 bn. USD worth of foreign exchange. Our government’s policy towards lower crude prices is not predictable - will it pass the benefit to the consumer, allow the benefit to accrue to the exchequer, or a bit of both? Irrespective, lower crude prices will support our economy, not just via the petrol (or diesel) pump, but also through lower input costs for fertiliser and plastics. These are a third area I will actively explore for investment opportunities.

But to each his own. This is going to be an ‘interesting’ period in all asset markets, and If you are an active investor, you are sure to come up with investable theses of your own.

Just don’t freeze.