Navigating the New Global Economic Trade War

The world around us is shifting beneath our feet; honestly, we don't know where we're heading.

2020, the COVID-19 pandemic hit the world, creating a global crisis similar to the Spanish flu from a century ago. Healthcare systems worldwide were strained, governments enforced lockdowns and social distancing, and our daily lives changed dramatically. The global economy suffered severely, with widespread job losses and financial hardships. This crisis showed us how interconnected we are as a global society and how we share responsibility for each other.

As we recover from these challenges, we are reminded of the Trade Wars of the 1930s. Back then, countries used protectionist measures and tariffs to shield their industries during the Great Depression. These actions damaged international relations and worsened the economic crisis, leading to high unemployment and social unrest.

With the recent US tariff announcement, there's talk about entering another trade war situation. Are we prepared for the uncertainties this would bring?

Immediate Economic Effects

• Supply Chain Problems: Global supply chains are deeply connected, with parts often crossing borders multiple times. Disruptions would cause production delays and shortages.

• Higher Consumer Prices: Companies would likely pass tariffs onto consumers, making everyday goods more expensive and driving inflation. India has managed to guard against inflation, but a full-blown trade war wouldn't provide immunity.

• Market Instability: Financial markets have already reacted, and volatility may continue as investors reassess company values based on changing trade conditions.

Geopolitical Effects

• Economic Separation: Countries might form distinct trading groups based on political alliances. As the world's manufacturing capital, China may try to dump their products, which India should guard against.

• Digital Trade Barriers: Today's trade war could affect digital services, data sharing, and intellectual property. Countries are becoming more protective, and India should take steps to protect national security, including defence.

• Currency Conflicts: Trade tensions could lead to currency policy issues, with countries possibly devaluing their currencies for advantage. The US wants the dollar to depreciate, but other currencies may depreciate too. This is complex, and only time will tell.

Long-Term Changes

• Shifting Global Value Chains: Companies will seek more diverse suppliers and production sites to reduce dependency on specific countries. India could benefit from this "China+1" approach.

• Technological Independence: Countries will likely invest heavily in their technologies. India should use this opportunity to ensure self-reliance in AI/ML/robotics, with government incentives for entrepreneurs.

• Challenges for Institutions: The WTO and other global economic bodies might weaken.

Unlike the 1930s, today's interconnected financial systems, rapid global communication, and international institutions provide some protection. However, a prolonged trade war could still cause significant economic damage and further fragment the global economy.

Impact on Various Asset Classes:

Equities

• Multinational Corporations will likely struggle.

• Domestic-focused companies perform better, especially in essential services.

• Defensive sectors like utilities and consumer staples may outperform cyclical sectors.

Fixed Income

• Government Bonds may do well as RBI decreases interest rates.

• Corporate Bonds from companies with a domestic focus may not be affected.

Commodities

• Gold will likely gain as a safe haven during uncertainty. It's already moved from 60k to 90k and could rally further if countries replace USD with gold reserves.

• Industrial Metals could see price drops due to lower demand.

• Infrastructure projects might receive more government support as countries focus inward.

Real Estate

• Residential Real Estate is generally more stable, but luxury markets may struggle in trade-dependent areas.

• Indian REITs are domestically focused and may not feel the impact unless global firms scale down Indian operations.

Overall, businesses focused on India's growth story should continue to do well despite global economic tensions. India's domestic consumption is vital to its economy, accounting for around 60% of its GDP. This substantial reliance on internal markets might be a silver lining amidst the ongoing trade war.