Since the start of the century, the world has witnessed many economic dislocations from the dotcom bubble to the global financial crisis to name a few. Each of them has a different characteristic and the resultant impact on the economy. These events have had a prolonged impact on the economy and the recovery thereof. For instance, the global financial crisis of 2008 resulted in erosion of more than 50 percent of world capitalization. The markets only recovered by March 2014. The corresponding fall in the World Trade Volume Index was 20 percent, which recovered to its previous peak by March 2012. Both market capitalisation and economic activity took a significant amount of time to go back to their previous peak.
However, the current tariff wars are more of a man-made reset and need to be viewed from another lens. Donald Trump’s re-election as the US president brought some cheer to the financial markets despite knowing his agenda to reset global trade with an attempt to bring back jobs to America and reduce the fiscal deficit burden. That didn’t last too long thanks to his “shock and awe” strategy of posting sporadic and contradictory views on social media! The equity benchmark indices started a downward spiral in the last month of 2024 before stabilizing in January 2025.
Market volatility resumed after Trump took oath as the 47th president of the United States on 20th January 2025. Heightened volatility persisted across asset classes including equity, debt, commodities and currency markets thanks to periodic social media posts on a variety of topics ranging from sharing views on the dollar to reducing deficit to what the FED chair should do to bring back jobs to the US.
The period of uncertainty reached its crescendo on 2nd April 2025, Liberation Day, with the announcement of tariffs on various countries in a move to reset the global trade status quo. As a result, world market capitalization witnessed a maximum drawdown of 15 percent since the start of the calendar year. That translates to erosion of $20 trillion of market capitalization. It may so happen that the event which marked the culmination of his “shock and awe” policy making may have also heralded the end of peak uncertainty for the markets. This seems counter intuitive to his earlier actions, and we dwell down as to why we believe “peak volatility” is behind us. This doesn’t mean his posts on social media will not impact daily moves of markets, but the range of scenarios that were very wide when he assumed presidency are likely to narrow going forward.
The uncertainties can subside owing to 2 major factors going ahead. First, the economic data coming out of the US is expected to be weak in the next couple of quarters. This will lead to accentuated pain for the common man. Announcement of tariffs has disrupted supply chains and raised questions on availability of products & cost of goods. Businesses are navigating through uncertainty and unpredictability due to a decline in consumer sentiment. If the sentiment does not improve by the end of this year (holiday season in the US), it could lead to an even more challenging time going forward. At the end of the day, one must remember that Trump has operated as a businessman for over 40 years and understands the nitty gritty of doing business. Would he want to leave a legacy where businesses must continuously deal with uncertainty that eventually leads to paralyses of decision making? Second, in the US, the political party often prevails over the president and with an election coming up next year, the Republican Party would want to appeal to the moderates to maintain its position given their current slim majority. This necessity could lead to a softening of stance on policies going forward.
The US 10-year yield could be another variable that the Trump administration would be keenly watching out for. If the yield moves closer to 5 percent, it will surpass the nominal GDP and set off alarm bells as the US is already dealing with high levels of debt. That would put additional pressure on policymakers to avoid any further destabilizing actions. A combination of economic, political and market-related events could lead to a moderation in resetting global trade policies than what Trump started out with.
The big question to ask is if we have encountered a man-made reset in the past (in India) and what are the lessons learnt from it? India’s demonetisation in November 2016 is the closest example that comes to mind. Initially, the markets reacted violently but were quick to recover lost ground. While the range of expectations of the economy would grapple with the situation and evolve were very wide during that short period of 3-6 months. As time progressed, the learning was that the economy and the economic cycles are far more anti-fragile than what most analysts had predicted. While we did not go back to status quo, we witnessed the emergence of a super trend following the man-made reset i.e. formalisation of economy post demonetisation. Similarly, the man-made reset in the US will result in large-scale changes. The fear of an extended period of economic freeze or complete collapse of trade seems unlikely now. The solution will be somewhere in treading a middle path – such as intervention by the central bank or adjustments to the fiscal deficit by prudent policy decisions. Just like water finds its path of least resistance, economies and markets too will evolve along the lines of the super trend of the future. Rather than taking a despondent view of markets, one will be better served by following the massive super trends that will emerge going forward and take advantage of the opportunities it will likely create for businesses.
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The views and opinions expressed are those of Harish Krishnan, Co-CIO & Head Equity, Aditya Birla Sun Life AMC Ltd. and do not necessarily reflect the views of Aditya Birla Sun Life AMC Ltd (“ABSLAMC”) /Aditya Birla Sun Life Mutual Fund (“the Fund”). ABSLAMC/ the Fund is not guaranteeing/offering/communicating any indicative yield on investments. ABSLAMC or any of its officers, employees, personnel, directors make no representation or warranty, express or implied, as to the accuracy, completeness or reliability of the content and hereby disclaim any liability with regard to the same. Recipients of this material should exercise due care and read the scheme information document (including if necessary, obtaining the advice of tax/legal/accounting/financial/other professional(s) prior to taking of any decision, acting or omitting to act. Further, the recipient shall not copy/circulate/reproduce/quote contents of this interview, in part or in whole, or in any other manner whatsoever without prior and explicit approval of ABSLAMC.
