Brace for volatility, build for the bull run: Sridhar Sivaram’s take on market mayhem

How do you make sense of what is going on in the market? Only two people are smiling, Donald Trump and you.
Sridhar Sivaram: That is because I go to the jungle. I cannot understand what is happening here.

If this market continues, a lot of people will go to the jungle.
Sridhar Sivaram: Exactly. So, the starting point should be that you have to think from US and Trump’s standpoint that where were they before all this started. So, the average tariffs in the US was 2.5%. So, many countries were having free lunch for multiple years.

I mean just take an example of China. Their trade surplus with the US was about 400 billion. And if you add what they used to export through Mexico, say add another 200 billion, that is about $600 billion of trade surplus with US. And what is US known for? Services.

And the services exports are banned in China. So, you cannot even export. I mean there is no Google. There is no Facebook. So, this was basically a one-sided trade barriers that were created. Not just not just China, look at what is happening in India. Look at our tariffs. I mean when Mr Uday Kotak says that we are a very protected country.

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We have not created a global brand in so many years because our entrepreneurs do not want to compete globally because our country is protecting them. So, I can go on and on. The point is that this had to happen at some point. Look at the debt of US.

It is about 36-38 trillion. They are adding two trillion a year. It is unsustainable. We all know that something like this had to happen. And this is the first step.

We will see calm in the next few weeks or months because as we speak already four-five countries have offered zero tariff to the US. There are 50 other countries if I go by what the Treasury Secretary spoke.

There are 50 other countries that have offered to lower or make the tariff zero. What we could see is more trade in the future because if every country makes their tariff zero, we could see more tariff excepting for China. I think China will be the big question mark because they have gone on to a retaliatory mode.

Barring that if most countries play their cards well including India and I am surprised that India has not yet announced anything, maybe the negotiations are going on the backside.

Why should we have 100% tariffs on Harley-Davidson. How many people can afford to buy it anyway. Who are we trying to protect or liquor for that matter. How does it matter.

What is the percentage of GDP that gets affected by all this. So, if we play our cards well, the damage to the Indian economy should be less. I am not saying that it will not happen at all. There will be damage if there is trade barriers, but if we play our cards well, our damage could be less.

This is a problem that is solvable and I am sure even from the US standpoint this is a negotiating tactics and eventually things will fall into place, that is my view and that is how I am looking forward. I think what the US is doing is not wrong is what I am trying to say.

I know a lot of people are saying this is self-goal. I do not think it is self-goal. They do not have a choice.

Just to take that point forward. Everybody knew tariffs were coming. Donald Trump had made that part of his election promise. When Donald Trump came American markets they rallied. Dollar showed strength. I mean seriously, when he came American markets went into oh, my God this is the best thing that has happened to America and it is only when tariffs have been rolled out because everybody knew the markets are reacting. Wo pehle kya tha aur yeh kya hai.
Sridhar Sivaram: So, there was also a belief that Donald Trump speaks a lot, but he implements less. Even within our own community if you see a lot of pundits would have come and spoken that he will say and he will roll back.
He will say and he will roll back which also happened a few times. But this time they were serious because you have to remember that they have been pushed to the wall.

I mean they are at the edge. I mean you cannot have an economy which has 150% debt to GDP and adding 2 trillion every year. So, the numbers were so absurd that they have inherited a very poor balance sheet that something like this had to happen.

So, I can question whether the percentage of tariffs that and the way they calculated tariffs, I mean that was so absurd, that has created more panic. Maybe that could have been slightly better. But the fact that there has to be a fair play globally with US, that was a given. I am not surprised that US is pushing for it. In fact at some extent what they are doing is right.

Okay, fair point, and I also know there are many countries which are extremely dependent on US like a Vietnam, etc. are saying that we are going to completely give up on the tariffs and let us try and negotiate on the table. But how do you think this entire battle between the two giants US and China is going to play out and what is that going to mean for the world?
Sridhar Sivaram: So, that may not play out that well. So, just look at it. I know a lot of people think that if there is an incremental 30% tariff, the entire 30% goes to the consumer, that is not right because look at the math. If any consumer goods lands into a port, when it reaches a store, it is three to four times of that.

So, if it is $5, you multiply it by four. Same for the tariff. So, the tariff is say 24% or 25%, you divide that by four, so roughly about 6% odd is the impact on the consumer. To a large extent will be borne by the consumer and the retailer and to a smaller extent by the producer. So, the net impact is not that high. I mean they were anyway getting 2-3% inflation in their product.

So, there will be some increase but it is not as dramatic as people make out to be. When you get into the nitty-gritties of it, so you have to keep that in mind that these looks quite absurd but at the end of it these are manageable risk, so prices will go up. As I said services exports are banned in China. Will China agree to relook at that? I am not sure. So, why should the US give up?

I think they are too far into the game.
Sridhar Sivaram: So, that is exactly the problem that we have had a one-sided trade agreements across the globe and US has been bearing all the brunt. At some point they had to wake up and this is the point. Anyway they are pushed to the corner. So, which is why I said that most countries the risks are manageable.

With China, it is a bit different and now they have gone into a retaliatory mode which worsens the situation. I am not sure how that plays out. So, I will be very worried if I am a Chinese investor. But barring that most other countries it is a manageable risk. We can reduce our tariffs, from India standpoint I am looking at it selfishly. We can reduce most of our tariffs.

But their fight does not have any collateral damage for the world right is what I am trying to ask.
Sridhar Sivaram: The China US?

Yes.
Sridhar Sivaram: No, it does have because China is the manufacturing hub for the world. So, if they have surplus capacity what do they do? They will then try to dump it into other countries. So, Vietnam again is a question mark. Everybody knows is Vietnam really manufacturing all this, which is why even though Vietnam has offered to make it zero, US has not immediately agreed because they want to ensure that this is not China coming to Vietnam.

So, it is not as easy. I mean we sitting here and can say whatever we want. When somebody is running a country as large as US, there are a lot of issues that has to be handled.

And as the Treasury Secretary recently said that 10% of the people in the US hold 90% of the wealth, so these are staggering numbers. So, it has been a one-sided capitalist economy that has been going through and maybe lot of people have been left behind.

So, I am not trying to support Trump or to support anybody else, I am just saying they are pushed to the corner, something like this had to happen today or tomorrow.

It has happened today. If we are smart in India, we can solve this problem very easily. Will there be collateral damage? Yes, there will be. If global trade takes a hit, we will have collateral damage, that can be handled because maybe we take a hit on the GDP, the government has to come up.

Reserve Bank has to come up with some measures. We have seen issues like this in 2008, 2020, these are issues that can be handled. I do not know about China, that is a big question mark. They have a problem.

But amidst this global sell-off where we are seeing not just the equity markets but even the base metals and even gold, I want to have your take on the gold since you have been a supporter. But amidst this sell-off, where will investors find a place to hide? What is your take?
Sridhar Sivaram: So, which is why I always say that asset allocation is very important. You cannot have all your eggs in only equity, so you need to have debt, you need to have gold.

You diversify your asset allocation in a manner that when equity takes a hit, there are other asset classes which will be more stable and question on base metal and gold, let us accept that gold is up almost 50% in the last one year despite the correction that we are seeing. You cannot have an asset class keep going up one way.

I am a big bull on gold but I am saying that it has gone up too fast, too soon. So, there will be some correction, but over a period of time I am still bullish on gold that this is an asset class which will do well, but it cannot go up 50% every year. This is not possible.

So, that is how I look at it. Metals will take a hit. If there is a risk off, then metals will take a hit which eventually is good for India. India is an importer of metals, oil, but when you have a risk off, there is no hiding place.

Historically I have seen and you know markets much more than anybody does that when you see this kind of panic, that is the beginning of the end of the correction. I mean the collateral damage which has happened is so high that sabki band baj gayi hai. That is the typical time you would say that prices they start becoming attractive. News may not become clear, but prices will start becoming attractive. So, are we nearing that stage?
Sridhar Sivaram: In the largecap surely. In the small and midcap, you can still question whether you want to pay 30-40 times for companies whose growth prospects are now being questioned. It is becoming a very stock specific.

If you ask me which sector looks great today, I do not have an answer. I mean that is the issue that there are opportunities in the market and we have been a bit cautious on the market for a while and one of the reasons was this we wanted to wait and see how this whole Trump tariff plays out.

Our own internal view was it will happen. This is not the one where he says and it will not happen. Our view was that the tariffs will come and as you can see from my tone that we did think that what they are doing is not wrong.

Maybe the way they have done is wrong but I do not think what they are doing because it was very one-sided. So, we were expecting some of this. Does it mean that our portfolios do not get hurt? It does get hurt.

I mean even if I am 15% cash, 85% is still invested in the market, it does hurt. But that is how the markets are, there is no one way, we have had seven-eight years of very good markets. People just start believing that every year equity markets give you positive returns, that is not the case, you will have years when equities will not give returns, that is the time when you build your portfolio for the next bull run, so that is how I would put it, that this is the time to look at your portfolios, move out of mistakes and build your portfolio.