India growth story intact; PSU banks, telcos attractive: Market expert

In conversation with The Federal, G Chokkalingam, market expert and founder of Equinomics, shares his perspectives on the potential impact of the Trump tariffs on various sectors, investment strategies, and the upcoming Monetary Policy Committee (MPC) meeting.

Edited excerpts:

No, it was misunderstood. The tariff is going to stay for the long term, and there is no doubt about it. India will be impacted, but the market's reaction, falling more than 30 lakh crore in the last seven to eight trading days, is unwarranted.

This reaction is based on solid data and logic.

First, India is not an export-driven economy in terms of goods exports. Goods exports account for only 10 per cent of the total GDP, with 90 per cent of GDP driven by domestic demand and IT services. Fortunately, IT services are not part of this tariff war. If IT services had been affected, India's economy would have been in a tougher spot, and the market would have faced a more significant crisis.

Second, while overall exports account for 10 per cent of GDP, India's exports to the USA make up 20 per cent of total exports. This means only 2 per cent of India's GDP is vulnerable to the tariff impact. This 2 per cent is unlikely to drop to zero, though it can see a 20-30 per cent impact. As a result, India's GDP may fall by 30-50 basis points, but the market has overreacted. Additionally, domestic demand remains strong.

Also read: Indian markets rebound sharply after historic downturn; IT leads the charge

In the last 20 years, during global crises like the Lehman Brothers crash, the 2016 deflationary conditions, and the 2020 Covid pandemic, India was affected but also emerged as one of the major economies to gain. Why?

Oil prices invariably crashed. As of yesterday, oil prices dropped 30 per cent, which is a huge benefit for the Indian economy, given we spend around $140-150 billion annually on oil imports. Even a 20 per cent savings would amount to about $30 billion, boosting foreign exchange reserves, the exchange rate, and inflation.

Eventually, this leads to interest rate cuts, as seen during past crises. Therefore, the market's reaction is overblown.

As long as service exports are unaffected, India’s growth story will continue. Importantly, China is the most negatively affected by the tariff hikes, and the USA is also significantly impacted due to tariffs on imports from almost all major economies.

India is positioned between these two, so the impact on India is not likely to be severe.

We see almost every sector feeling the pressure. As the Volatility Index spikes over 50 per cent, which sectors do you see as most vulnerable right now?

Primarily, gems and jewellery, as well as some exporters who are not listed. To some extent, the auto sector will also be impacted, and the market has already punished these sectors. But instead of focusing on the impacted sectors, one should look at the robust sectors – those driven by domestic demand. For example, telecom is unaffected by the export market, and the banking industry is also largely insulated, despite growth slowing.

Domestic pharma remains strong too, despite some short-term volatility. Similarly, real estate stocks are generally unaffected by tariffs or exchange rates.

There are many segments that are not impacted by the tariff situation or exchange rate fluctuations. These should be the focus for investors. It’s important not to panic and offload stocks in response to market movements. As you rightly said, yesterday saw a panic-driven sell-off, with no rationale behind punishing even financial stocks and domestic pharma companies.

In the medium to long term, fundamentals prevail. In the short term, speculation and fear can have an impact, but the market is smart. The right stocks, backed by strong fundamentals, will start recovering soon, and I have 100 per cent conviction that quality stocks will begin to rebound today itself.

There’s a lot of comfort from a valuation perspective on the large-caps, it seems. Even mid and small-caps were trading at a very rich premium, around 40 per cent to historical averages. They are close to a 15 per cent premium versus historical averages. So, a lot of froth has come off. You think time is ripe to deploy capital at these levels?

You are absolutely right. But there are interesting insights here. First, in the Sensex and Nifty, you have 8 to 10 sectors dominating the indices. Unfortunately, a majority of these sectors are experiencing what I call "single-digit growth syndrome".

For example, FMCG volume growth is in the single digits, automobile volume growth is in the single digits, IT services exports in dollar terms are in the single digits, and cement sales are also in the single digits. There are several other sectors facing similar low growth.

Also read: Tariffs, visa tensions amidst weak demand trigger perfect storm for Indian IT stocks

So, while it is safe to invest in the Sensex and Nifty, with a 30 to 50 per cent allocation to large-caps from this perspective, if you ask me whether the Sensex and Nifty will outperform small and mid-caps from here, I don’t think they will, mainly because of the single-digit growth syndrome.

Now, regarding small-caps, the issue is that there’s a universe of more than 4,000 stocks, and the average PE is influenced by a certain set of stocks. However, there is a large majority of small-cap stocks that have fallen by anywhere between 30 per cent to even 60 per cent during the market downturn. Many of these stocks are available at a single-digit PE. Not only that, many do not exhibit the single-digit growth syndrome we see in Sensex and Nifty sectors.

There are numerous individual products, services, and business models in the small and mid-cap space that remain robust. So, there is a dichotomy within the small-cap segment.

Yes, New Age companies, especially in New Energy, are trading at very high valuations, but at the same time, many high-quality stocks are trading at very attractive valuations. In my view, this second set of small and mid-cap stocks is poised to outperform the entire market in the short to medium term.

If you really were to buy on dips, what sectors should one be looking at this point of time?

Also read: Trump tariff tremors leave Sensex, Nifty shuddering with global peers

The first sector to focus on is the public sector banks. The old banking sector looks attractive, and within that, many public sector banks have become one-time price-to-adjusted book value plays.

The second sector is telecom, which will continue to grow. The third is the domestic pharma sector, especially companies where over 70 per cent of the revenue comes from the domestic market, with some even having up to 80 per cent of total revenue from domestic pharma.

These three sectors – public sector banks, telecom, and domestic pharma – are extremely appealing right now.

JP Morgan warns of a 60 per cent chance of global recession after Trump's tariffs. India’s IT sector and pharma have significant exposure to the United States. And the popular opinion is to avoid these sectors right now. Your thoughts?

Time will prove. I think, you know, I am a student of economics. Of course, I am not saying that everything I say will be 100 per cent true, but my views are based on solid logic.

After the Great Depression, central banks and governments gained many tools to avoid a recession, and a lot of lessons were learned. If you look at the last 20 years, similar concerns arose after the dot-com bust, after the Lehman crisis, and after the 2016 January-February period, where some people even wrote books like Great Depression Revisited. But the chances of a great recession are very low. First, as I mentioned, the tools and experiences available now are vast.

For example, during the Southern Europe debt crisis, the European Central Bank created over 85 billion euros overnight and credited them into the banks' accounts. Such measures weren’t possible in the past.

Now, coming back to the US,this situation is necessary because, otherwise, the US economy will be in a great crisis in the medium to long term. The US trade deficit was more than $900 billion last year, and China alone generated $361 billion of trade surplus with the US in 2024. If this trend continued, the US economy would face a crisis in the next five to eight years. So, the trade war is justified and will likely continue.

However, if you ask me whether this aggressive trade war will last long, I would say it’s not possible for the US.

Look at the US markets, which are already down 18-22 per cent, wiping out over $5 trillion. Small businesses in the US are also suffering a lot. The US consumer, who is used to buying cheap goods, is now facing higher prices due to the aggressive tariffs across all products from all economies. While China is the worst affected, even the US will feel the brunt of this in the short term. This is part of the trade tactics, but such aggressive tariffs won’t stay for long.

If you look at the smartness of Mr Trump, even before implementing these tariffs, he used threats to get certain outcomes. For example, India increased its oil imports from the US by 50 per cent in February and by 100 per cent in March. Many economies started adjusting and helping the US economy even before these tariffs were announced.

Now, with the help of these aggressive tariffs, the US will slightly or significantly upset the current equilibrium in its favour. After that, Mr Trump will likely seek a balanced solution, avoiding a recession. No leadership can afford to allow a disruption of wealth in the stock market or an economic collapse.

Now, the second important point for the US is that interest rates are at 55 basis points. This gives the US a tool, it can reduce interest rates by up to 500 basis points to avoid a recession. This would have a significant impact on the economy. So, let’s not forget that this tool is available, and because of it, a great recession is not likely.

You think this is a great time for investors to move into gold?

As for gold, it is not the ideal time to increase your holdings. It’s fine to hold gold, but increasing your position isn’t ideal right now. Gold is a peculiar asset because its demand and supply aren’t driven by fundamentals. Instead, it’s perception-driven, which leads to imbalances that cause rises or falls in price.

Typically, when the equity asset class is under risk, gold goes up. However, when the economy faces difficulties, both gold and equity can fall. Right now, we’re in a situation where global economic growth is uncertain, and because of that, gold won’t rise independently while equities fall.

Also read: Trump tariffs cripple Andhra’s shrimp industry; Naidu writes to Centre

In such a scenario, both will likely experience weakness.

We have the MPC meeting coming up tomorrow. What are your expectations? Tariffs are expected to hike prices in the US but it could be deflationary in India. Do you think it is high time for the Central Bank to cut rates aggressively?

It is the right time to cut. If not now, then in the next two to three months, the rate cut will happen aggressively.

As I mentioned earlier, global pain also brings some gain for India, which has been proven in the last two decades, three times. Now, it is happening for the fourth time – oil prices are down 30 per cent, which will significantly reduce inflation.

This morning, there was another interesting development. According to global media, the monsoon is expected to be normal. If the monsoon is normal and oil prices remain 25 per cent to 30 per cent cheaper, we can certainly expect the RBI to cut rates.

The central bank will be compelled to do so in order to manage the deflationary signs emerging worldwide. A recession will not happen, but deflationary signals are already evident in the form of falling metal prices and oil prices. Both of these factors are beneficial for India as they help reduce inflation.