Markets to remain volatile as trade war escalates

This week, Indian markets are expected to remain volatile as the US-China trade war has escalated.

On Friday, China raised tariffs on US goods to 125 per cent, up from 84 per cent, following President Trump’s tariff hike on Chinese imports to 145 per cent.

US sovereign bonds faced a sell-off due to the escalating tariff war, causing yields to rise after three months of decline. Meanwhile, reports suggest that India is considering zero-duty on imports from the US across various sectors to expedite a bilateral trade agreement.

On the macro front, markets will be tracking India’s retail inflation for March, China’s Q1 GDP data, US March retail sales, European Central Bank interest rate decision, and comments from the Federal Reserve.

There will be action on the earnings front, with companies like ICICI Prudential, Wipro, Angel One, Infosys, HDFC Life, HDFC Bank and ICICI Bank amongst others announcing results this week. This is a truncated week as both Monday and Friday are trading holidays.

Amidst heightened volatility last week, the Nifty 50 ended with a marginal loss of 0.3 per cent at 22,829. Broader market indices too ended on a flattish note, with Nifty Midcap100 declining by 0.3 per cent while Nifty Smallcap100 was up 0.1 per cent.

Amongst sectors, FMCG was the top performer, rising 3.5 per cent due to positive sentiment after prediction of a normal monsoon season and expected boost in household income following changes in Income Tax laws applicable from April 2025.

Nifty Realty and Metals were the top losers, falling by 4 per cent and 3 per cent respectively. The Metals index was highly volatile on account of escalation of the US-China trade war.

The Reserve Bank of India (RBI) reduced its key repo rate for the second consecutive time by 25 basis points, bringing it down to 6 per cent (in-line with expectations) along with a change in policy stance to 'accommodative' from 'neutral' which refers to the approach aimed at boosting economic growth.

It also lowered India's GDP growth projection to 6.5 per cent from earlier 6.7 per cent for FY26 on the back of a spike in global volatility due to the impact of US trade policy uncertainties. The interest rate cut along with the recent liquidity injection by the RBI could benefit rate-sensitive sectors like banks, NBFCs, real estate and autos over the medium to long term.

TCS kicked off the earnings season last week, reporting a 1.7 per cent year-on-year decline in consolidated net profit, missing the market estimates. EBIT margin was 24.2 per cent, below our estimates. For FY25, the EBIT margin stood at 24.3 per cent vs. 24.7 per cent in FY24.

The company observed delays in decision-making around discretionary spending. The anticipated revival in such spending has not materialized. Overall, there is earnings risk for Indian IT services across the board, and we prefer bottom-up and margin expansion stories in place of top-down discretionary plays.

India's industrial production growth decelerated to a six-month low of 2.9 per cent in February after a strong start at 5 per cent in January, according to data released from the National Statistics Office (NSO) on Friday. This was mainly due to weak performance of the manufacturing, mining and power sectors during the month.

We estimate Nifty-50 earnings growth to remain muted at 2 per cent YoY for the January-March quarter. The overall modest earning is expected to be anchored by Metals, Telecom, Healthcare, Tech and Banking and Financial Services.

It is likely to be weakened by Oil and Gas, Real Estate, and Cement. Overall, we expect Nifty earnings to grow by 5 per cent in FY25 and 14 per cent in FY26. We remain biased toward large-caps and suggest investors to avoid globally exposed sectors like IT, pharma, metals and rather focus on domestic economy-linked stocks as they are likely to offer relative stability in the current uncertain environment.

(The author is head of research, Wealth Management, Motilal Oswal Financial Services Ltd)