Stock market strategy: Should you reduce equity exposure amid US tariff concerns?

Indian stock markets witnessed a sharp rebound in March, reversing the prolonged selloff that began in October 2024. The recovery was driven by renewed buying from foreign portfolio investors (FPIs), bargain hunting by domestic investors, and optimism around potential trade negotiations with the US. With global uncertainties persisting, analysts remain cautiously optimistic about the market’s near-term trajectory.

The recent uptrend in Indian equities has been largely supported by a shift in FPI sentiment. Over the last two weeks of March, FPIs emerged as net buyers, largely due to aggressive investments in Indian debt. This marked a notable slowdown in equity outflows compared to the previous months, providing a much-needed boost to market sentiment.

The Federal Reserve’s projection of two rate cuts later this year, along with the weakening US dollar amid slowing economic growth, further bolstered the appeal of Indian assets. The prospect of lower US interest rates typically makes emerging markets like India more attractive for foreign investors, as they chase higher returns.

Apart from this, the recent correction, which saw several stocks trading at steep discounts to their previous highs, created attractive buying opportunities.

As valuations became more reasonable, investors rushed to accumulate fundamentally strong stocks. Many stocks that were previously deemed overvalued have now become appealing, prompting selective buying. This wave of bargain hunting helped cool off frothy valuations, making room for further upside potential.

Key Factors Shaping the Market Outlook

While the market has rebounded, analysts caution that its future trajectory will depend on several external and domestic factors:

US Tariffs and Trade Negotiations: With the US set to impose reciprocal tariffs on imports from April 2, market sentiment will be influenced by how India responds. Hopes are high for a potential reprieve, as both countries have initiated bilateral trade talks. Senior officials began discussions on Wednesday, aiming to finalize the first tranche of the trade agreement by fall 2025.

Corporate Earnings: The upcoming January-March 2025 earnings season will be another critical factor. Strong corporate performance could reinforce positive sentiment, while disappointing results may dampen the recovery.

Chinese Market Performance: The trajectory of Chinese markets will also play a role in shaping foreign inflows. A strong recovery in China could shift FPI focus away from India, while continued weakness may support Indian equities.

Is it time to reduce weights in Equities?

Amid ongoing market volatility, leading investment experts are urging investors to maintain their equity positions and refrain from making drastic portfolio adjustments. While global uncertainties, including the threat of a trade war due to US tariffs, persist, analysts believe India’s improving macroeconomic landscape offers room for further market gains.

VK Vijayakumar, Chief Investment Strategist at Geojit Investments Limited, believes investors should hold on to their equity allocations for now. He highlights that India’s macroeconomic indicators are showing steady improvement, creating scope for the market to regain momentum. While the recent trade tariff threats by former US President Donald Trump have raised global concerns, Vijayakumar views them as temporary headwinds.

“The global impact of Trump’s reciprocal tariffs is likely to be short-lived. However, if it escalates into a full-blown trade war, global equity markets could face sharper corrections. In such a scenario, reducing equity exposure may be prudent. Otherwise, remaining invested makes more sense,” he explained.

Trivesh D., COO of Tradejini said markets never move in a straight line—they frequently face headwinds. "Timing the market by buying low and selling high is nearly impossible,” he remarked.

Trivesh also warned against investor complacency. He noted that many retail investors, whose portfolios surged by over 20 per cent CAGR post-COVID, now have unrealistic expectations of guaranteed double-digit returns.

“Some investors are acting like someone who assumes they can master deep waters after just one day of swimming. A 20-30 per cent return is not guaranteed—it’s an exception, not the norm,” he cautioned.

Diversification Is Key

Both experts emphasised the importance of diversification in uncertain markets. Trivesh advised investors to balance their portfolios across different asset classes rather than concentrating their funds in a single category.

“Investors should avoid halting their investments altogether. Instead, focus on resilient stocks—those that remain steady despite broader market corrections. Diversifying into multiple asset classes will help mitigate overall risk,” he added.

Despite market volatility and global uncertainties, investment experts advise staying invested in equities rather than making knee-jerk reactions. With India’s macro fundamentals improving and DIIs providing a steady cushion, maintaining a diversified portfolio with a long-term perspective is viewed as the most effective strategy.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.