Arjuna (Fictional Character): Krishna, what is this effect of tariffs on the share market?
Krishna (Fictional Character): Arjuna, on April 2, 2025, President of United States of America Donald Trump imposed reciprocal tariffs at the rate of 34% on China, 27% on India, 20% on the European Union, and 24% on Japan and other countries. While other countries were still analysing the effect, China retaliated by imposing higher tariffs on the U.S. Due to this, the global market saw a sharp fall, Monday, April 7, 2025, with the Sensex fell 2,227 points and the Nifty dropped over 740 points. After that, on Wednesday, the President of America Donald Trump said that he has paused the tariff measures for a period of 90 days, which led to a sharp rise in global markets. Indian markets also saw a rise where Sensex saw rise of 1310 and Nifty saw rise of 430 points. We are living in times of uncertainty.
Arjuna (Fictional Character): Krishna, what does this tariff mean?
Krishna (Fictional Character): Arjuna, Treat Tariff just like a duty or a tax in layman terms. This is done to protect the domestic industry from foreign companies.
For Example, if India is importing some goods from other countries and India has imposed tariff (duty/tax) on the goods being imported, it makes the import expensive. This is the reason why in India, for example- foreign cars like Mercedez, Lamborghini, Ferrari etc are very expensive.
President of America says that since other countries had applied tariff on the US a long time ago hence he has applied reciprocal tariff on other countries.
Arjuna (Fictional Character): Krishna, Why did the share market started falling because of this?
Krishna (Fictional Character): Arjuna, When countries are engaged in applying tariffs on each other, it imbalances the global trade. For Example, US is the biggest importer of goods in the world, if US has applied tariffs on Indian Medicines, the medicines which are consumed by Americans, will get costly, also the profitability of Indian Pharma companies also goes down. It is a blow for both the countries.
This is the effect of tariffs on the global economy. Due to this chain reaction worldwide, inflation increases due to which we can be heading to a global recession and hence the global equity market panicked and we saw a very sharp fall in Share markets globally.
Arjuna (Fictional Character): Krishna, what should a common man do as an investor in such a case?
Krishna (Fictional Character): Arjuna, There are various types of investors in markets, some are long-term investors, some are medium-term investors, some are short-term investors and some are new investors. Let us analyse them one by one.
1. Long term investor- For long term investors, who have their investment horizon over 10+ years, they are not worried about these corrections because they have seen many such corrections in the past. During these times, a long term investor just focusses to reduce his risk exposure at times of volatility.
2. Medium term Investor- An investor who invests with horizon of 5-10 years, must carefully assess his risk appetite, he must cut down risky investments in these times of volatility and shift to safe investment. For Example- Instead of investing in Mid and Small Cap companies and Mutual Funds which are very much volatile in nature, he should shift in investments to safe returns, such as Large Cap companies, balance advantage, hybrid funds, which reduces the downside risk and give safe returns.
3. Short term investors- A short term investor is one which invests with 3-5 years investment horizon, for short term investor, since his investment horizon is very small, he canny enjoy the compounding benefits like Long term investor, hence he should not invest in risky bets and should play safe. Though he may not enjoy multibagger returns, but still he can enjoy returns.
4. New Investor- A new investor who has started investing from January 2024, has his portfolio turned red, but new investor must not panic from these situations and stick to his investment strategy. At first he must protect his capital, he can do so by investing in debt funds, which has fixed returns, and have limited downside, this way his capital stays protected and when these uncertain times are gone, he can take risk during those times can enjoy multibagger returns.
Arjuna (Fictional Character): Krishna, what one should learn from this?
Krishna (Fictional Character): Arjuna, right now isn't the time to chase after quick profits or enjoy capital returns. Instead, it's more important to focus on survival in the market, i.e protecting the capital, and wait for better opportunities. As Warren Buffett says, "Only those people who stay on the field long enough enjoy in the fruits in the long run, rather than those who keep looking at the scoreboard."
Share markets are cyclical in nature; there are numerous examples where there were severe uncertainties, in 2008, 2013, and 2020, when the market fell, and portfolios turned red. But after that, we saw such a rise in capital markets where the global market made new highs. So, in times of uncertainty, protection of capital is must so that we can enjoy the capital appreciation in the long run.
CAclubindia
