US-China Tariff Conflict: India’s recent market rally will need support from a stronger macroeconomic backdrop: Ajay Rajadhyaksha, Barclays

India’s recent equity rally will need support from a stronger macroeconomic backdrop, said Ajay Rajadhyaksha, global chairman of research at Barclays. In an interview with Himadri Buch, New York-based Rajadhyaksha spoke about the US-China tariff conflict, US treasury, China and Gold, among other topics. Edited excerpts:

How do you see the recent US-China tariff truce playing out? Is the worst over on the tariff front?

By far, yes. While we are still going to end up with sizable tariffs on imports this year compared to the start of the year, it is important to look at where we were just five weeks ago. At that point, with tariffs at 145% on one side and 125% on the other, we were essentially facing a virtual embargo on trade between the two largest economies in the world. Had that continued for another 3-4 months, the consequences would have been severe. Even in the US, many jobs depend on products coming from China. Take the iPhone, for instance. A base iPhone sells for around $1,100. Of that, about $450 is the cost of manufacturing it in China. But the other $450 goes into research, design, development, marketing and advertising costs that are all tied to jobs in the US. So, when the supply chain is disrupted, the spillover effect is significant, especially for smaller businesses. What’s important now is we are no longer staring at a wave of small business bankruptcies or facing empty shelves in US retail stores. If we weren’t willing to go through that in May and June, there is no chance we were going to escalate further in mid-July, especially right before the holiday shopping season. So, most of the worst is behind us there is no question about it.

Indian stocks had rallied as they were perceived to be less affected by tariffs. Now that the tariff tensions have eased, what does it mean for India?
That may start to change now. For Indian equities to mount a new rally from here, it will depend on whether the macro improves. The macroeconomic environment in India over the last 6-9 months has not been terrible, but it is been more mediocre than it was 18 months ago. Back then, it seemed easy to argue that the country could grow at 8% for 20 straight years. That is no longer the case. As the world starts looking again at other Asian equity markets or even Europe, it starts to take away little bit from India.

When you talk to global asset allocators, what do they say about India?

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From a global asset allocator’s standpoint, India gets put in the same basket as the rest of them. So, if an investor sitting in London or New York has $100, 60-70% is going to be in the US, and the remaining 30% has to be allocated in Europe, Latin America or Asia. Indian bond market tends to be harder to invest in for the average bond investor sitting in the US.
Having said that, the perception of Indian equities is pretty positive. This is a market that has historically been rewarding to customers for the last several years, which is not true in the case of the Chinese equity market. In terms of size, Asia is about 40% of the world’s economies. But the financial markets are not developed enough. Capital controls still exist. Like, I cannot just put as much money as I want and take it out when I want. Given how well Indian large companies have done over the last 20 years, in relative terms, the financial markets still have a lot of catch-up to do. People sitting in Asia perhaps don’t appreciate how little focus there is on an individual Asian market and that includes the Indian market for investors who sit in London and New York.

What are the key risks that markets are not pricing in adequately?
The one asset class that still behaving in a concerning fashion is the 30-year long bond, which remains close to 5%. Even though a recession has been avoided, it’s almost certain that 2025 will be slower than 2024. If longer interest rates start to move to 5.5%, and the 10-year goes to 5%, it’s because the US is just not willing to do what is required to get our debt in order. This may sound like a strong statement, but the US as a government is genuinely spending money like a drunken sailor on shore. We did it last year, the year before, are doing it now, plan to do it next year, and the risk is that, eventually, the bond market will say enough.

What are your top picks at the moment?
I would probably pick the big six in the US — the exception being, Tesla, which has now fallen by the wayside a little bit in investors’ minds. They no longer talk about the big seven. Despite all this noise about trade, the single biggest economic force over the next 2-4 years is going to be AI and the speed with which that ripples through economies and the US probably still is in lead position. But at this point, the Chinese tech sector looks very attractive given the difference in valuations. They are making strides on AI and pushing AI almost as a government through the economy to the extent they can. They are making strides on robotics and infusing with AI. That is not reflected at all in valuation. Away from that, the dollar asset has near-term upside. I would not, even now, be a buyer of longer US bonds and worried about longer-plus interest rates.

Is China a buy as of now?
Yes, and the reason is partly because of valuations. Indian ETFs trade at a 20–21–22 multiple, while Chinese ETFs trade at a 9–10–11 multiple. But the other part of the reason is that I am genuinely excited about how quickly they are making strides across various technology fronts.

Twenty five years ago, the cream of the US corporate sector included companies no one talks about now like General Electric, Intel, IBM. They still exist, but all of the Big Six tech names came up in just the last 20–25 years. There is an equivalent happening right now working beneath the surface, especially because we have less visibility into China’s innovation hubs like Chengdu, Guangzhou, or Hangzhou. So yes, China is fine.

What is your view on safe-haven gold now that markets have rebounded?
Gold is going to struggle. We may see a short pull-back, but it has seen a massive rally in the last two and a half years, and it very much looks like it’s topping out. In the near term or in the next few months, I suspect gold will struggle to go up.

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