Whalesbook
THE SEAMLESS LINK
The recently enacted trade agreement between India and the United States marks a significant recalibration of bilateral economic ties, focusing on dismantling long-standing tariff barriers. This pact is anticipated to bolster India's export capabilities and revise its competitive standing on the global stage, particularly for industries reliant on high labor input. The reduction of export tariffs into the US from an average of 50% down to around 18% positions Indian goods more favorably compared to regional competitors like Pakistan and Vietnam. This development occurs alongside other recent trade agreements with blocs such as the EU and UK, potentially influencing currency valuations and attracting foreign capital inflows. Previously, India navigated challenging tariff structures, including a 25% reciprocal levy and an additional 25% linked to Russian oil trade, which complicated export strategies.
Export Competitiveness Boosted
The cornerstone of the new agreement is the substantial reduction in tariffs applied to Indian products entering the US market. Under the revised terms, these tariffs are capped at 18%, providing an advantage of 1-2 percentage points over key rivals, a benefit especially crucial for sectors such as textiles, leather goods, gems, and jewellery. Concurrently, tariffs on US goods imported into India have been reduced to zero, with most agricultural products excluded from this provision. Brokerage firm Jefferies identifies auto ancillaries, solar manufacturing, chemicals, textiles, and specific Adani Group companies as prime beneficiaries. Within these, Sona Comstar and Bharat Forge are noted for auto components; Navin Fluorine, PI Industries, and SRF for chemicals; and Welspun Living for textiles. A potential downside exists if imported oil and gas from the US prove more expensive on a landed basis, which could negatively impact Indian oil marketing companies. The broader positive sentiment for exports, coupled with potential rupee strengthening, is seen as a catalyst for renewed foreign portfolio investor (FPI) engagement. The US remains India's largest export destination, representing $87 billion or 18% of total Indian exports.
Investor Sentiment and Portfolio Adjustments
Despite the trade deal's positive implications, foreign portfolio investor sentiment towards India has remained cautious, marked by approximately $34 billion in outflows over the past 16 months. An analysis covering 63 emerging market funds indicates that India's allocation has fallen below benchmark levels, with nearly 60% of these funds currently underweight on the Indian market. Lingering concerns include a perceived scarcity of AI-driven growth opportunities, a weak rupee, and the prior absence of a comprehensive trade agreement with the US. However, Jefferies anticipates a meaningful improvement in the rupee's outlook. In line with these market dynamics and the trade deal, Jefferies has adjusted its model portfolio. The brokerage has reduced its exposure to Information Technology (IT) stocks and increased its allocation to metals, moving the materials sector to an overweight stance after recent sector weakness.
Jefferies' Top Picks and Outlook
Jefferies' preferred picks within the metals sector are Hindustan Zinc and JSW Steel. Hindustan Zinc is favored for its attractive exposure to silver and zinc, underpinned by a strong cost advantage, with an expected 41% EBITDA growth in FY27 driven by higher silver prices. JSW Steel is projected to experience a sharp sequential improvement in earnings, attributed to rising domestic steel prices and trade measures implemented by China. Jefferies forecasts JSW Steel's EBITDA to increase by 34% quarter-on-quarter for the March quarter and 45% year-on-year in FY27. Furthermore, Jefferies has replaced Godrej Consumer Products with Eternal in its model portfolio, citing Eternal's robust growth and margin expansion in the quick commerce and food delivery segments. The brokerage believes Eternal, currently trading approximately 25% below its peak valuation, presents an improved risk-reward profile. The anticipated strengthening of the rupee, supported by these trade agreements, could trigger renewed FPI inflows and shift current negative sentiment.