Have Markets Completely Discounted Trump Tariffs?
Wall Street has changed its mind about Donald Trump’s tariffs
On Episode 632 of The Core Report, financial journalist Govindraj Ethiraj talks to Chirag Doshi, Executive Director, LGT Wealth India. We also feature an excerpt from our recent Weekend Edition interview with Sanjeev Prasad, Managing Director & Co- Head at Kotak Institutional Equities.
SHOW NOTES
(00:00) The Take
(03:43) Have markets completely discounted Trump tariffs?
(07:13) India’s direct tax collections fall
(08:34) HUL has a new CEO and the challenges ahead
(16:41) Finding value in the fixed income market
NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on [email protected].
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Good morning, it's Monday, the 14th of July, and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital.
The Take
Car maker Tesla in the news for a lot of things mostly not to do with cars has said it's launching tomorrow in India with its Tesla Experience Centre in Mumbai, more specifically at BKC or the Bandra-Kudla Complex if you wanna drop by. The launch and sale will be of cars that are not manufactured in India as was originally desired by India, rather of cars made in China and the United States and imported here, lock, stock, and barrel.
While the first consignment would have faced peak customer duties of about 70%, that's for values below $40,000, subsequent consignments may see reduced import duties, and this, of course, depends on what the final contours of the India-US trade agreement are. Tesla was booed extensively by India in the last year, but times have changed for Tesla and the electric vehicle industry. Among other things, the Chinese have now arrived, shaking up the global EV market in a manner a few legacy product markets have been shaken up, and that too by rank outsiders, ranging from battery-making companies like BYD to mobile phone software to hardware manufacturers like Xiaomi.
When it's not China, it's Vietnam. Vietnamese electric vehicle maker WinFast has said it'll start production at its $2 billion facility in Tuticorin in Tamil Nadu by the end of this month, according to a report in Business Standard. Moreover, WinFast hopes to start vehicle deliveries from the festive season starting in August, according to that report.
WinFast Auto is setting up a 150,000 unit per annum manufacturing facility, along with a 27-city dealership network, battery value chain partnerships, as well as aftermarket and service tie-ups. And, of course, WinFast will export cars from its Tamil Nadu plant. While the approach in itself is no guarantee for success, an embedded made-in-India approach has usually worked for car makers, whether the Korean giants like Hyundai, Japanese makers like Toyota and Honda, or the European car makers like Mercedes, BMW, Skoda, and Audi.
And finally, even as Tesla has hemmed and hawed in the last year, Indian players like Mahindra's and Tata's have stepped up their EV game, and consumers of both brands have responded enthusiastically to their EV cars. India is a tough market to crack. American brands like Ford, General Motors have set up shop in India in recent decades and tried hard, but not succeeded, not like the Koreans or Japanese.
Now, there may be some lessons in that, and maybe that was exactly what Tesla was trying to avoid to start with. Tesla now has excess manufacturing capacity elsewhere in the world and would obviously prefer to send finished products into countries like India, as it is doing with other countries who allow more free imports. While manufacturing jobs that could have come with Tesla, which are not, but will do with latest entrants like WinFast, are desirable, maybe for some car companies, India could be a better source for components and software.
Tesla already imports components from India and reportedly started an R&D centre in India four years ago, though we don't have too many details on that. But other car makers have a larger presence, but Tesla may well end up creating the jobs that were expected of it, except that it might be in software rather than hardware.
And that brings us to the top stories and themes of the day.
Have the stock markets completely discounted Trump's tariffs?
Finding value in the fixed income market.
India's direct tax collections have fallen
And Hindustan Unilever has a new CEO and the challenge is ahead.
Discounting Trump
Wall Street has changed its mind about Donald Trump's tariffs. The initial reaction in April, or rather on April 2nd, 2025, was shock and surprise after the first import tariffs were unveiled, which in turn were the highest in more than a century in the United States. Stocks fell some 12% in a week, treasury rates jumped, but since that April low, even in the midst of continuing threats and actions, the S&P 500 has now risen 26%.
So President Trump is obviously doing something right, or the markets think he will not do what he threatens, or whatever he's doing is not gonna affect the fortunes of the companies that trade on the markets, or it does not matter for now. The Chairman of International Capital Strategies, Douglas Redeker, which advises institutional investors, told the Washington Post over the weekend that he believed that risks were building up. According to him, Trump now feels a certain sense of invincibility and is willing to take positions on tariffs that are much more aggressive than probably anyone anticipated, because he does seem to believe he can get away with anything.
So the Trump tariff train continues to roll. Last week, he sent out letters to trading partners, including Japan, South Korea, Canada, Brazil, and the Philippines, amongst many others. This week, declaring that tariffs would go into effect starting the 1st of August.
On Saturday, he threatened 30% tariffs on imports from the European Union and Mexico, and also along the way, another additional 10% on BRICS countries, that includes Brazil, Russia, India, and China and South Africa, and 500% tariffs on countries that import Russian crude, which also includes India. Now, the date for all of this to take effect is August 1st, so there is some time, but an ascendant market is giving the Trump administration the confidence and the licence to do maybe exactly what they've been promising on the tariff front. So what happens then? Well, some market strategists expect the bull market to continue.
Trade policy, they feel, should become less volatile this year, as the administration, that's the US administration, signs deals with trading partners, according to the global head of equities for UBS financial services, quoted by Washington Post. According to the same global head, the S&P 500 could rise an additional 4% by mid-2026, and some of Trump's most eye-watering tariff proposals, such as a 200% tax on imported pharmaceuticals, are unlikely to materialise, she wrote in that report quoted by the Washington Post. On the other hand, the US economy is looking steady to strong, or nothing really negative has happened till now.
Inflation is down relative to earlier months, more jobs have been added. All of this, of course, could change in the coming months. So back home, the Wall Street too, in some ways, has shrugged off Trump tariffs, though there are pockets of concerns, like those pharmaceutical exports or IT services exports, particularly if the US economy slows down, that is, if it does.
For now, it's the uncertainty elsewhere that is affecting sentiment at the business level, rather than at the stock market level. So last week was range-bound for the Indian markets. The Sensex fell about 689 points, and closed at 82,500.
The Nifty 50 was down 205 points to 25,149. In the broader markets, the Nifty Mid-Cap and the Nifty Small Cap 100 also fell about 0.9 and 1% each. The Nifty Auto and the Nifty IT were amongst the sectors that were down the most, about less than 2% last week.
The rupee has mostly held steady last week, despite being under pressure from higher foreign portfolio outflows, and ended at Rs.85.80 on Friday, as against its close of Rs.85.63 in the previous session, down about 0.5% on the week, according to Reuters.
Direct Taxes Are Down
India's net direct tax collection has fallen about 1.3% year-on-year to about Rs.560,000 crore, or Rs.5.6 trillion, during the April 1st to July 10th period, according to the government, in a statement on Friday.
Direct taxes, which include corporate and personal taxes, grew about 3.2% to Rs.6.6 trillion, or Rs.660,000 crore on a gross basis during that period. The government also said it has issued tax refunds worth about Rs.1.01 trillion, or Rs.101,000 crore, roughly during that period, which is 38% higher than last year. So some of that reduction in net direct tax revenue so far this financial year, which is lower than last year, could be an account of the tax relief offered to the middle class in the last union budget, though there is weakness in both corporate and personal income tax receipts.
The Challenges for HUL
The Hindustan Unilever stock price was up about 4.6% on Friday after it named a senior executive at its parent Unilever, currently with parent Unilever, with a strong track record as its chief executive. Priya Nair, who is president of Unilever's beauty and well-being business, will take over as CEO of HUL. That's the Indian subsidiary on the 1st of August.
Reuters quoted Citi Research saying in a note that Nair comes with a strong track record, adding it will watch for any strategy refresh after a period of relatively tough performance by HUL. Now, HUL and companies like it have been hitting some headwinds for a while, and it would be interesting to see whether there are any strategic shifts here on. Over the weekend, I spoke with Sanjeev Prasad, managing director and co-head of Kotak Institutional Equities, and I asked him, among other things, why he was bearish on consumer product stocks or why he felt they were overvalued, all of which has a bearing on HUL.
INTERVIEW TRANSCRIPT
Sanjeev Prasad: But the fundamental issue, what has changed in India is that growth rates are a lot lower now for many sectors, compared to what you would have seen in the previous decade and the decades before that. And this is more evident in the consumer-facing sectors, whether it's autos, consumer staples, consumer registration rate, the last three, four years, growth rates have come off dramatically. So, that is one change in context.
And there's one more bigger change which is coming. It's across sectors, you are seeing a lot of changes in the market structure, et cetera, et cetera, which is resulting in the incumbents starting to lose the dominance which they had in their respective categories or sectors at one point in time. Markets have become more accommodative, products are losing, I would say partly brands are losing relevance, distribution channels are no longer as strong for incumbents as what used to be historically.
So, somewhere the market is not looking at these big changes which are taking place, which would logically result in growth and profitability both for the incumbents being lower going forward. So, why are the violations the same? That doesn't make any sense, right?
If growth is going to be lower, and you are seeing that for the last three, four years, that is very visible, especially for the consumer-facing terms. And if the medium-term prospects are also more or less indicating the same, given the levels of disruption one is seeing, you have to have a lower multiple to start with, growth is lower, profitability is at risk. So, why is the market still somewhere believing that we should continue to manage companies the way we have managed them in the past?
So, that is a fundamental argument against the way the market seems to be discarding too many sectors and stocks currently.
First of all, you look at the earnings growth of these companies in the last decade. If you look at the 2010 to 2019 period, I'm excluding 2020, because the last quarter of 2020 got affected by COVID. Most companies, consumer facing with the state of registration rate, were delivering low teen to even high teen earnings growth, by the way.
Lever, for example, delivered 13% over the nine-year timeframe. So there was maybe a justification for the high multiples, which the market is willing to give. I'm using HUBR as an example.
And most companies are in the same bracket. And the other thing was also keeping in mind the fact that post the GFC and the pre-pandemic period, you had a period of very, very low global rates. In fact, for most of the 2010 decade, you had pretty much zero global interest rates in all of the developed countries.
So in a way, your cost of equity was also the lowest side. So that could suggest between a combination of very high growth, low teen, mid teen, high teen kind of growth, and very low risk-related cost of equity, you could justify whatever 40, 50p the market was trading at. What has changed?
In the last two, three years, growth rates have come down dramatically. And we will just get into the reasons for that. But if you look at the growth rates of some of these companies, the last two years, that was at 523 to 525, lever's top-line growth is 2%, or CAGR.
Bottom-line growth is 3%, by the way. Asian paints have delivered negative revenue and bottom-line growth. So obviously, things have changed over here.
Somewhere the market is still not taking cognisance of this fact. The expectation is that we will go back to the jolly good days of the 2010 decade. I'm not a believer in that.
For the simple reason of not a change as far as the sectors are concerned. And jumping into the points that you made, what has changed is that fundamentally market structure has deteriorated for the worse. You are seeing more and more competition coming in.
You are seeing basic changes in lifestyle, consumer behaviour of households and customers. All that, in my view, will result in far lower growth for certain categories of products and also risk to profitability. When you look at the four risks which were highlighted in the report, number one is that brands are getting diluted.
That is obvious, right? You are seeing a lot more brands being available in the market. And the reason for that is the distribution channel is now becoming a lot more, I would say, democratic.
What I mean by that is earlier, there was only one distribution channel, which was the general trade channel, which the incumbents used to dominate. And there was limited shelf space in the Kirana store. If you walk into a Kirana store, you would see a few brands which have been selling for the last several years or decades.
And that's it. But now you have several more distribution channels come up. You have the entire model retailing piece, which has come up, which is the big box retailing of like D-Mart or Reliance Retail.
You have e-commerce, you have big commerce, et cetera. So now the chances of a new brand getting launched and making some impact is a lot higher. You have seen a lot of B2C brands have come in and managed to establish a niche and also grow to a reasonable size now.
So that is number one, brands are getting diluted. You're also seeing competition from private-label brands of all these model retailing companies, whether it's Reliance or D-Mart, et cetera. They're all launching their own private-label brands.
So you are seeing a lot many brands getting launched. To some extent, brands are getting diluted. Distribution, which reinforced the brand power of many of these consumer-stable products.
That, as I said, is also getting weaker in a way. Number three is, and this may not be that relevant for consumer staples, but in many other categories, what we are seeing is what I call a standardisation of products. So in a way, let's say you look at a thing like cables, wires, fittings, et cetera.
I mean, Indian companies have been brilliant in creating brands out of these commodities. But my view is that over time, I think the risk of these so-called brands being again reduced to semi-commodity branded products or even only commoditised products exists. I mean, I don't know whether it will play out or not play out, but it's a risk at which the market should be cognisant of.
And I'll give you one example. If you look at any of the building materials, earlier you had a situation where most houses in India were built by the home buyer. You buy a piece of land as part of your house, and effectively you're going to buy your own materials in a way, or you get a contractor to buy the materials there.
So in a way, many of these products had a B2C relevance there. Incrementally, more and more developments are illustrated in this country or in India. This is now based in the form of large developments for large developers in the form of multi-building, multi-apartment, multi-building for developments.
So who's the buyer in that case? The buyer is not a developer. They're not the retainer or the guy who was building his own house.
So it's moving incrementally from a B2C channel to more of a B2B channel or B2B mode, I would say. So the chances of a brand existing in that case will clearly become a lot lower. The pricing power should logically go down.
Growth is not an issue. I'm not debating that point. Obviously, in India, things will grow, so that is not an issue at all.
But I think profitability could be at risk over here. And then you also have to change consumer behaviour.
Fixed Income Strategy
Several macro signals are steady at this point. Inflation is projected to go lower to 2.5% for the last month.
Interest rates are reaching lows not seen for many years. The Reserve Bank has turned on the liquidity tap, and this is a good time to borrow if you so choose. On the other hand, investors are looking to balance between somewhat unpredictable equity markets, which are being tossed around, between domestic growth outlook and global uncertainties from tariffs to geopolitics, and perhaps that's a good time to revisit fixed income and debt.
I reached out to Chirag Doshi, Chief Investment Officer of Fixed Income for LGT Wealth in India, and I began by asking him how he was seeing the overall fixed income market against the background of the macro numbers we just spoke about, and what was his strategy and allocation that he was looking at?
INTERVIEW TRANSCRIPT
Chirag Doshi: Yes, there is an expectation that inflation is going to be very benign. I think it is better than what RBI has also projected in the previous policy and that's because of factors. We all know that fruit prices are going down and because of the Bayesian seasonal effect, we'll have a number which is going to be in the two and a half to three percent range.
Now what that is going to do is that it is also going to push down the RBI projection for this year. If it comes at two and a half then the projections for this year which RBI said that it will be 3.7, it should be lower than that, which means that RBI will have more room to cut rates. We already saw that in the previous policy they had done a front loading of rate cuts.
Markets are expecting in August that there would be a pause because RBI has already said that there is a front loading which is being done. But if inflation keeps on continuing to be in the handles that we are seeing, that is three or closer to three percent, we will see that RBI will again have to cut rates which means that the environment is going to remain conducive for fixed income investors. There is a structural shift which we are seeing.
Real rates are in the positive territory and significantly positive territory which is driving the allocations towards fixed income. RBI being on an easing bias and supporting with liquidity infusion as well as the investors are now more educated, they know more about fixed income which is driving the portfolio flows and the fixed income instruments.
Govindraj Ethiraj: And when you say structural shift, is that what you meant? The way investors are looking at it or something else?
Chirag Doshi: Yeah, the way investors are looking at it. I think in the past few years what we have seen is that equity returns were what was driving portfolio allocation and portfolio returns. I think the way things are now, it's going to be fixed income which will drive the returns and it is also going to add stability.
I mean fixed income adds stability to the portfolio, it is less volatile and what you see is the volatility in the equity market. So there is some shift towards portfolio allocation and that is a structural shift. Investors are just not looking at fixed income as passive allocation to their portfolios.
It is something which we are looking at for a long term horizon because that adds stability along with returns and returns are not only coming from the AAA sovereigns. There is a huge shift towards locking in yields which is coming through the high yielding credits, restructured bonds, etc.
Govindraj Ethiraj: So could you dwell on that a little more? I mean in terms of the, if not newer, the newer interest areas within fixed income and how people are, at least some of the larger institutional investors are allocating their funds?
Chirag Doshi: See the past six months or one year, the fixed income returns have been coming from the sovereigns, the government bonds, the state development loans and AAAs where the yields have come down sharply because of the RBI's 100 basis points of rate cuts as well as liquidity infusion as well as the open market operations that RBI did. Now going ahead, our view is that RBI is not going to cut by another 100 basis points. So where do you derive returns from fixed income?
The answer is that you would look at chasing yields or locking in yields. Now the bonds which are say AA to AA+, they offer good returns in the portfolio by offering liquidity and high yielding credits. If you take a measured call, a calculated call where the corporate governance issues are not there, the cash flow governance are in place, that's where the investor interest is right now, especially for high net worth individuals, family offices, ultra high net worth individuals who are currently chasing yields because over there the predictability is quite high.
You don't have to only worry about capital gains giving you those returns. These are locked in and predictable for the time you are invested in those instruments.
Govindraj Ethiraj: So can you walk us through that again when you said these are companies with good corporate governance but weak financials?
Chirag Doshi: So not weak financials but I would say the credit rating is a little lower because they are new. For example Fintech, some startups, not only NBFCs but you know startups like who are in battery services or some companies who have been doing CAPEX for expanding their capacity but the rating has been lowered because of their stretched working capital requirements or little high gearing. But that doesn't mean that they are not generating cash flows and that they don't have the capacity to repay debt.
So ratings like AA- where you have yields in the range of 11 to 13 percent, they make a very compelling addition in the portfolios. And when you have the right governance in place along with tying up the cash flows and some triggers that you put in, it could give you a very good return. So that's what investors currently are looking at.
Govindraj Ethiraj: And if you were to look for let's say a year or two and how similarly rated instruments have performed, what's been the experience?
Chirag Doshi: So when what happens is generally in an interest rate cycle when the cycle begins, the liquids or the sovereigns, the AAA bonds, the government bonds, etc. they actually fall first. The yields in them fall first which means that the prices rise there first.
And when the spreads are highly compressed, that's when investors start looking at deploying in the AA and below instruments. And that's where the yield compression starts happening. So generally these bonds or these instruments start seeing flavour when the interest rate is near its bottom or RBI is towards the end of their weight easing cycle.
And hence what we are seeing in the next one or two years is what is going to happen there, where the yields will start compressing. And with the high liquidity that RBI has left in the system or currently continuously infusing, the spreads between the plain manila bonds and such instruments is only going to compress further. Banks are able to offer them working capital loans or term loans at a much lower rate than what they were offering one year back or one and a half year back.
So for them to only rely on capital markets again is not a question. So they have been borrowing from banks at much lower rates than what they are getting at money from the capital markets, which is the non-convertible debentures or commercial papers that they issue. And hence the demand is much higher than the supply currently for such issuers.
And hence we are seeing that the fall in the yields has been sharp and it will remain so. So we envisage in the next six months, the credit papers or the high yielding papers will fall much more sharply than the other instruments, which is the AAA or the solvents.
Govindraj Ethiraj: Right. And I'm going to come to portfolio mix in a moment. But a couple of questions before that.
How are you seeing the overall global flows at this point, given what all we've been seeing on US Treasuries and dollars and I mean, everything to do or triggered by the trade war?
Chirag Doshi: The global flows, especially in fixed income, have been healthy. You have seen that around 20 to 22 billion dollars we have seen and that is, of course, thanks to the inclusion in the global bond indices. In the US, the yields have been quite volatile.
The Indian yields have not been that volatile. We have only seen them coming down. The reason for that, it's twofold.
One is that the real interest rates in India are positive. RBI has enough reserves to protect the volatility in the currency, as well as RBI being favourable. So RBI is in an easing bias.
So that gives a lot of comfort to the foreign investors to invest money into India because the probability of the yields going down from here is much higher than it going up. So that gives them comfort. And hence, we are seeing that not only in the government bonds, but there has been a lot of interest in the high yielding credit or in the credit papers as well.
So it could be corporate bonds or high yielding credit. As you know, Chapurji Palanji came up with an issue which was for 3.4 billion crores, which was fully subscribed. So that shows that there is a lot of interest in Indian corporate bonds and especially in some of the compelling high yielding opportunities.
Govindraj Ethiraj: So at this point of time, in terms of a portfolio mix, what are you telling clients?
Chirag Doshi: So we are advising to allocate portfolios in a layered style now. Layered means that you can't do away with government bonds because there has to be some stability as well as liquidity in the portfolio. So around 40 to 50 percent is what we are advising to remain in the liquid part of the portfolio, which is AAA corporate bonds, AA plus and sovereigns and also state development loans because they offer 20 to 25 basis points, better yields than what sovereign bonds do or government bonds do and not at a very high duration.
So it should be between say four to seven years duration, which basically also gives you a benefit. So one, one and a half years down the line or two years down the line, when RBI will look at raising rates again, you will have bonds which will basically protect. So the risk reward in investing in those bonds is much better or in one, one and a half year down the line, you can switch them to very short term bonds after booking capital gains.
So 40 to 50 percent of the portfolio, we are recommending to allocate there. At 20 to 30 percent of the portfolio, we are recommending to allocate in AA plus to AA bonds, which gives you that term premium or yields, yield pickup over the plain vanilla sovereign bonds. Five to 10 percent in high yielding credit, which is A minus to AA minus, which basically again keeps the portfolio yield higher.
And these are names which you know, basically should be taken care with caution. So hence a professional advisor is recommended over here where you are taking care of the common ends because these bonds are illiquid in nature. You will not find them to be liquid.
You can't sell them at a very short notice. And five to 10 percent into the evolving hybrid like instruments, which are invited. You know, they are listed, they are regulated and they give you a quarterly flow and they are AAA rated.
So they offer a very compelling yield. So some of the publicly listed invites are offering seven to eight percent yields. Some of the privately listed invites, which are into roads, telecom, etc., are offering yields in the range of 13 to 15 percent. So that's what we are recommending investors right now.
Govindraj Ethiraj: Right. We've run out of time, Chirag. Thank you so much for joining me.
Chirag Doshi: Thanks. Thanks, Govind. It was a pleasure speaking to you.
