Sensex, Nifty Tumble: How Donald Trump’s Reciprocal Tariffs Are Impacting the Equity Markets

As you can see in the table below, major trading partners such as China and the European Union (EU) will be levied new duties of 34% and 20%, respectively.

India has been hit by a reciprocal tariff of 26% (revised downward from the original 27% published in the White House annexure).

India's relatively lower trade surplus with the US, in proportion to its overall exports, compared to countries like Vietnam (46%) and Thailand (36%), helped it avoid a steeper tariff rate.

According to the Center for Strategic and International Studies (CSIS), this is the most sweeping tariff hike since the Smoot-Hawley Tariff Act of 1930 - a law widely remembered for triggering a global trade war and worsening the Great Depression.

The rationale behind Liberation Day centres on Trump's belief that foreign trade and economic practices have created a national emergency. The responsive tariffs aim to strengthen the United States' international economic position and protect American workers.

According to a statement from the White House, "Large and persistent annual US goods trade deficits have led to the hollowing out of our manufacturing base; resulted in a lack of incentive to increase advanced domestic manufacturing capacity; undermined critical supply chains; and rendered our defense-industrial base dependent on foreign adversaries."

These tariffs will stay in place until President Trump determines that the threat stemming from the trade deficit and the underlying non-reciprocal treatment has been satisfied, resolved, or mitigated.

Another reason behind the tariffs could be that they would ultimately serve as a revenue-generating mechanism to finance the broad tax cut the administration hopes to announce by the end of the year.

However, economists view Trump's actions as reciprocal tantrums that would spark a global trade war and push global economies into a recession, rather than a sound economic policy.

Less than 48 hours after Trump raised tariff barriers to their highest levels in over a century, China announced on April 4, 2025, that it would impose an additional 34% duty on all US imports, adding fuel to the global trade war.

The global equity markets reflected the turmoil of investors surrounding the fears of recession and trade wars.

During the week ending on April 04, 2025, S&P 500, Nasdaq, and Dow Jones Industrial Average declined by 5.21%, 6.42%, and 4.15% respectively, enduring their worst week since 2020.

USD 5 trillion in the US equity market cap was eroded within two days, pushing the total market value lost since Trump's inauguration in January to nearly USD 8 trillion.

The Indian equity market has also not escaped the aftermath of the tariffs. On April 07, 2025, benchmark indices, Nifty 50 and BSE Sensex, fell around 2.9% and 2.7% respectively, recording one of their worst falls in recent years. The IT, Auto, and Metal sectors were among some of the worst hit. Indian markets, however, outperformed its Asian and European peers such as Japan's Nikkei 225, Germany's DAX, France's CAC, London's FTSE, and Hong Kong's Hang Seng index that plunged in the range of 5-13%.

Here's a quick overview of India's export-driven sectors that are likely to bear the brunt of reciprocal tariffs:

Equity investors need to tread carefully as the trade tensions arising from Trump's reciprocal tariffs are likely to fuel market volatility in the near future.

In addition, the Indian equity market is facing headwinds from several global and domestic quarters - including the ongoing Russia-Ukraine war, Israel's military operations in Gaza, chances of geoeconomic fragmentation, and the possibility of an economic slowdown.

In such a scenario, the likelihood of markets correcting further cannot be ruled out.

What Should Mutual Fund Investors Do?

In the current market environment, you, the investor, would do well to avoid Sectoral/Thematic Funds. These funds, while offering the potential for high returns when the stocks of the underlying sector/theme perform well, also increase the downside risk during uncertain or volatile market conditions due to the highly concentrated nature of the portfolio.

With reciprocal tariffs expected to impact exports and narrow profit margins for Indian firms in affected sectors, returns from such funds could remain highly uncertain in the short to medium term.

While sectors/goods such as pharma, semiconductors, and certain critical minerals have been spared from the tariff axe for the time being, the possibility of future revisions cannot be denied.

Instead, a "Core & Satellite" approach would be prudent while investing in equity mutual funds now.

The core portion of your equity mutual fund portfolio, referring to the portfolio's more stable, long-term equity holdings, should mainly comprise some of the best Large Cap Funds, Flexi-cap Funds/Multi-cap Funds, and Value/Contra Funds. These funds can add a layer of stability to your investment portfolio while offering the potential to steadily grow your wealth by keeping an investment horizon of at least 5 years.

On the other hand, the satellite portion of your investment portfolio may include a couple of the best Mid Cap Funds (investment horizon of at least 5-7 years) and an Aggressive Hybrid Fund (investment horizon of at least 3-5 years). These funds have the potential to boost your portfolio's overall returns given their risk-return characteristics.

Avoid adding Small Cap Funds to your portfolio at this juncture, unless you are a very aggressive investor with an appetite for very high risk, have a sound understanding of the characteristics of these funds, and are willing to hold them for a period of 7 years or more.

In addition to equities for wealth creation, it would be prudent to allocate thoughtfully to debt and fixed income instruments, as well as gold. A sensible exposure to these asset classes will add diversification to your portfolio and offer some protection during periods of equity market volatility.

Investing in a Multi-Asset Allocation Fund would be a meaningful choice for a tactical allocation to equity, debt, and gold.

To Conclude...

Given the imminent equity market volatility, a prudent asset allocation tailored to your personal risk profile, the envisioned financial goal/s, and the time in hand to achieve those goals will help pave the path for financial success in the long run.

Additionally, a periodic mutual fund portfolio review would also help you assess whether your investments are well-diversified across different asset classes, such as equities, bonds, and other investment avenues.

If needed, seek assistance from a SEBI-registered investment advisor to build a well-diversified portfolio that can effectively ride out any brewing storm.

Be a thoughtful investor.

Happy investing!

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Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.