Tariffs & Trade Wars: What Investors Should Do

The markets have been on a rollercoaster lately, with tariffs and trade wars making investors feel like they’re on a wild ride. There was hope that U.S. President Donald Trump was just making empty threats about imposing tariffs on Mexico and Canada—no such luck. When he went ahead and slapped a 25% tariff on Mexico and Canada, along with a 10% hike on Chinese goods, the markets didn’t react well. On the other hand, gold prices surged—standard in times of uncertainty.

But why does this sudden tariff action have such a significant impact, and what should investors be doing in response?

Why Tariffs Matter to Investors

At first glance, tariffs may seem like just a temporary disruption. But the reality is that they have the potential to affect the global economy in lasting ways. According to the Tax Foundation, U.S. tariffs on Mexico and Canada could lower long-term GDP growth by 0.4%. The impact could be even worse if Mexico and Canada retaliate.

Another tricky part of dealing with tariffs is figuring out how they’ll affect corporate earnings. With uncertainty hanging in the air, investors often pull back, not just from companies directly affected by tariffs but from riskier assets in general.

The ripple effect has been felt across markets, with investors flocking to safer options. While tariffs are meant to protect domestic industries, they can often backfire, dragging down overall economic growth and hurting corporate profits.

How Trump’s Policies Affect India

India has its own set of concerns when it comes to U.S. trade policies. Trump’s approval of a $397 million deal to support Pakistan’s F-16 fighter jets raised red flags in India, especially considering the security implications.

Then, there’s the unpredictable nature of Trump’s stance on China. While he imposed tariffs on Chinese goods, he also welcomed Chinese investments in the U.S., making the future of U.S.-China relations uncertain.

For India, the growing ties between the U.S. and China could present a challenge. India has long benefited from its role as a counterbalance to China’s economic and geopolitical influence. But a stronger U.S.-China relationship could erode India’s bargaining power in key areas like defence and technology.

What Should Investors Do Now?

The current market might feel a bit shaky, but there’s a silver lining. Over the past 30 years, the three major indices—Nifty, Sensex, and Nifty 500—have faced significant corrections in 8 of those years. But here’s the thing: history shows that even after downturns, the market has always found its way back stronger, as you can see in the chart below.

Here’s what you can do to stay on track:

Focus on Long-Term Strategies: Sure, the market is volatile, but that’s when savvy investors make their moves. Market downturns can bring about attractive valuations, so stay focused on the long-term horizon.
Stick to Quality Large-Caps: It may be tempting to invest in small and mid-cap stocks. These stocks offer huge growth potential but come with higher risks. If you're eyeing this segment, tread carefully, and make sure it aligns with your risk appetite. A safer strategy would be to accumulate quality large-caps after assessing the earnings-valuation gap.
Diversify: Don’t put all your eggs in one basket. A well-diversified portfolio helps reduce risk and ensures that no single investment can wreck your returns.
Rebalance: It’s always a good idea to reassess your portfolio regularly. Make sure it’s in line with your financial goals and risk tolerance, and adjust as needed to seize new opportunities.

Avoid Common Pitfalls

Falling markets are a breeding ground for mistakes. Here’s what to watch out for:

Averaging Down: It might seem tempting to buy more of a stock as its price falls, but don’t fall into the trap of "catching the falling knife." Always assess whether a stock is genuinely undervalued or if there are deeper problems.
Chasing Past Performers: Just because a stock performed well in the last rally doesn’t mean it will do the same this time. Focus on companies with strong fundamentals and real growth potential.

Conclusion

The market’s current turbulence, driven by tariffs and shifting global trade dynamics, might seem unsettling. But with the right strategy, you can turn volatility into opportunity. Keep your eyes on long-term goals, stay disciplined, and make sure your portfolio is well-diversified and aligned with your risk tolerance.

Remember, market cycles are inevitable. We might be in a downturn now, but history shows that the market will rebound—and come back even stronger. Stay patient, stay informed, and focus on quality investments, and you’ll be in a great position to navigate these uncertain times and seize the opportunities ahead.

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