In our first part, we looked at the challenges faced by the Modi administration in its second term. We covered the Banking / NBFC space and the stresses faced by most of the sector. We also looked at the state of the Indian economy and why there are structural challenges which need to be addressed soon. Going forward we look at the global economy and markets.
Since the beginning of his term, Donald Trump of the USA has taken a hard-line stance on most topical issues and has actively participated in stoking up his friends and foes alike. With the recent targeting of Chinese companies and exports, has he bitten off more than he can chew? We believe that Mr Trump is trying his level best to improve the decades of negligence shown by successive administrations towards the domestic US manufacturing and hi-tech sectors. He has picked up fights where he believes that the opponents of the US companies have used devious practices in collusion with their national governments to become larger and stronger. This is but natural in any globalised economy and we do not find fault with Trump trying to protect American interests. However, China which is arguably the largest beneficiary of the US largesse over the years has become strong enough to withstand his minor threats. Hence, we have seen the rapid escalation in trade tariffs between the two countries. We do not know, who will eventually prevail, but as long as these tensions remain the US and Chinese economies will be crippled. There is no other nation or bloc which can take over from either nation. The global effects are already being felt in most markets. We have seen US interest rates take a nosedive signalling weakness in the economy and Chinese GDP numbers also show a slowdown. With this backdrop, Indian export sectors will be severely hampered in maintaining margins or clients. Unless Mr Modi gives a strong fillip to the domestic consumption, we might see further slowdown in our own economy.
We recommend a conservative portfolio allocation for the near term, more of the allocation towards large cap equity and less towards mid cap and small caps. Even keeping cash is not a bad idea. For debt investments look for absolute quality and strong names even if the yield is lesser.
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