What happened?
- The Trump administration has announced “reciprocal” tariffs across the board consisting of two parts:
A 10% baseline tariff on all imports from all countries excluding Canada and Mexico, set to take effect April 5.
An additional tariff on major trading partners (excluding Canada and Mexico), set to take effect April 9.
- The move affects the entire US$3.3 trillion import basket of the US as nearly 60% of those imports would now be levied with over 20% duties. (source: Bernstein)
- This can have significant inflationary impact on the US economy, thereby increasing the possibility of a recession.
- The tariffs are likely to be the starting point for negotiations with US trading partners, and some of them – particularly the second component – may be potentially reduced or rolled back.
Impact on India
| Country | Tariff announced during Trump’s speech (%) |
|---|---|
| Cambodia | 49% |
| Vietnam | 46% |
| Bangladesh | 37% |
| Thailand | 36% |
| China | 34% |
| Indonesia | 32% |
| Taiwan | 32% |
| Switzerland | 31% |
| South Africa | 30% |
| India | 26% |
| South Korea | 25% |
| Malaysia | 24% |
| Japan | 24% |
| EU | 20% |
| UK | 10% |
| Baseline | 10% |
- Trump has announced 26% tariffs on India, which is higher than what the market expected, but two high-ticket Indian exports have been left untouched:
IT Services – does not fall under goods-specific imports.
Pharmaceuticals – pharma products tend not be discretionary in nature and have been placed on an exempted list of sectors for now. - A potential weakening of the US environment over time due to the tariffs and the impact of AI, could affect corporate decisions around IT spending. This, in turn, can potentially translate into a medium-term impact on IT Services.
- The tariffs will have direct effect on sectors such as auto components, electronics, gems and jewellery, but what works in India’s favour is that countries that compete with India in such sectors are mostly facing even steeper tariffs.
- Tariffs are expected to bite the hardest around US discretionary spending, where India does not have a significant enough presence to be materially affected.
- In addition, about 80% of the Indian economy is also domestic oriented. Indian exports to the US comprise just 2% of India's GDP, compared to 11% to 23% of GDP for some peers.
- The two countries are currently negotiating a bilateral trade deal where India is expected to lower tariffs on American goods in exchange for US concessions, so, it is unlikely that we will see too many retaliatory measures from New Delhi.
Portfolio impact
Limited direct impact:
- The portfolio has relatively low exposure to Indian exporters.
- Healthcare: The second largest OW position (third largest for the SICAV vehicle) and do not foresee any impact on our pharma holdings currently.
- IT Services: No direct impact from tariffs. We are aware of the rising risk of second order impacts, should the tariffs result in a slowdown in the US economy and IT spending by US corporates, and are positioning accordingly.
- Autos: We hold a components manufacturer with minimal exports to the US, and the main auto player is a domestic story.
- Capital Goods: Exposure of our existing holdings to US exports is small.
- Materials: We expect our aluminium play to be a beneficiary of the tariffs on aluminium that have already been imposed (not part of the latest round of announcements), but there may also be second order indirect impact on end-demand for aluminium products in the US that we are cognisant of.
- In our view, India should be able to safely navigate the tariffs through negotiations with US instead of any tit-for-tat measures.
- Near-term negative sentiment should be mitigated as the macro picture improves – the government and the central bank are taking steps to address the recent weakness in the economy whilst the corporate sector remains relatively healthy.
- The risk lies in two areas:
Potential US recession that could trigger a global economic slowdown.
Supply chain disruptions caused by global tariffs with India potentially getting caught in the crossfire of an international trade war.
- In such instances, we would expect the portfolio’s downside to be well-protected given our quality focus.
Important information
Risk factors you should consider prior to investing:
- The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.
- Past performance is not a guide to future results.
- Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
- The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
- The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
- The Company may charge expenses to capital which may erode the capital value of the investment.
- Movements in exchange rates will impact on both the level of income received and the capital value of your investment.
- There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
- As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
- The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down.
- Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.
Other important information:
Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London, EC2M 4AG, authorised and regulated by the Financial Conduct Authority in the UK.
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