Global markets have entered a phase of heightened volatility as the Trump administration implements sweeping tariffs, sparing no country in the process. The initial 10% tariff took effect on April 5, with the remaining tranche set to roll out on April 9. There is considerable ambiguity about the duration and eventual resolution of this tariff war. As expected, markets are on edge. While some nations may yield to U.S. pressure, others—most notably China—have chosen to retaliate. It appears that the United States may have miscalculated its strategic advantage, as it currently lacks the leverage to dictate terms unilaterally. What may seem like a nationalist economic move may, in fact, become a structural drag on U.S. and global growth.

At this point, no one truly understands the full-scale ramifications of these tariffs on countries, regions, or the broader global economy. Contrary to simplified media narratives, the situation is far from linear. It is not a straightforward case of action and equal reaction—it is a complex, multi-dimensional chessboard, with each move triggering an array of unpredictable counter-moves.

How Should You Navigate the Tariff War?

Export-dependent companies are likely to bear the brunt, as global supply chains adjust and competition intensifies under restricted access to major markets. On the other hand, companies with a strong domestic focus may prove more resilient—particularly those not operating in commodity-linked sectors, which are more susceptible to international dumping as a retaliatory strategy.

Given this backdrop, we recommend realigning your portfolio toward sectors driven by domestic demand. Banking and financial services remain well-insulated from global shocks. Similarly, FMCG companies are positioned to benefit, especially if falling commodity prices reduce input costs. With the general elections now behind us, the government is expected to resume infrastructure spending with fewer constraints—making capital goods and infrastructure sectors worth serious consideration.

In contrast, IT services could face revenue and margin pressure due to potential slowdowns in U.S. corporate spending. The recent stability in the rupee—now back to its end-2024 levels—also diminishes any upside from currency depreciation, which typically benefits exporters.

In short, a portfolio skewed toward domestic-facing sectors could offer relative safety and potential outperformance. Should the tariff headwinds subside, exposure to globally linked sectors can be re-evaluated and adjusted accordingly.

Focus Shifts to Earnings Season

While the tariff situation may dominate headlines, long-term investors should focus on the fundamentals—namely, the upcoming March 2025 earnings season and the accompanying management commentary. The noise around tariffs will eventually fade; solid fundamentals will always prevail.

Although we don’t anticipate a particularly strong March quarter, the outlook for June appears more promising. Several supportive tailwinds are beginning to emerge. Crude oil, which peaked above $80 per barrel in January 2025, has since declined to below $65. Union Minister Hardeep Puri recently indicated that if prices remain stable, fuel cost reductions could follow.

Additionally, the Rs 1 lakh crore rebate introduced in the budget is likely to result in higher take-home pay for many, potentially boosting urban consumption. Rural India is already benefitting from record kharif and rabi harvests, and a normal monsoon forecast adds further optimism to rural demand and sentiment.

In light of global macro uncertainty, we also expect the government to introduce fresh fiscal measures to support growth. Meanwhile, the RBI has already executed one rate cut, and another is widely expected in the upcoming monetary policy review.

Foreign Portfolio Investors (FPIs), who were aggressive sellers at the start of the year, are showing signs of moderation. January saw outflows exceeding Rs 78,000 crore, which dropped to Rs 34,000 crore in February and just Rs 4,000 crore in March. With the U.S. markets experiencing a sharp correction, we anticipate increased capital inflows into emerging markets—particularly those with strong domestic growth stories. India, with its resilient consumption-driven economy, remains uniquely positioned to benefit.

While the tariff war may have rattled sentiment, it also presents an opportunity to build a high-conviction portfolio. As global uncertainty begins to stabilise, we believe market sentiment will improve markedly in the second half of 2025. Long-term investors should prepare accordingly.