US-China trade framework a step forward, but final deal still unclear: Santosh Rao

"Biden had very restrictive sanctions on semiconductors. Is US going to give it up just for rare earth? I think that is the trade-off. We need to see what the final outcome of this negotiation is, just to see who is getting what and at what cost," says Santosh Rao, Manhattan Venture Partners.
ADVERTISEMENT Firstly, help us understand what do you make of the US-China trade deal of day two because some negotiations have been made, trade deal has already been made and it is rare earth exports that has seen a bit of a respite. Give us your sense.
Santosh Rao: Yes, I think it is definitely a step forward, but it is definitely not all the way because it still has to come to the US. Trump has to approve it. President Xi has to approve it. So, the framework is good. But we have gone back and forth so many times. So, no one is rushing yet. They want to see where the final trade deals land. But at this point, it is a step forward. They are talking. US needs rare earth materials. China needs the US technologies especially the semis. So, I do not know what is a fair deal. I mean, Biden had very restrictive sanctions on semiconductors. Is US going to give it up just for rare earth? I think that is the trade-off. We need to see what the final outcome of this negotiation is, just to see who is getting what and at what cost.
Now, what se understand from these talks prima facie is that both of these countries have agreed to stick to the Geneva trade consensus so far wherein US is imposing a 30% tariff, China on the other side a 10% tariff. Earlier a lower court in the US had overruled these tariffs, but you have an appeals court in Washington yesterday that had said that these tariffs can continue till trade consensus is reached. How long-lasting do you see this tool and do you believe that this could be the new normal when it comes to tariff rates between US and China?
Santosh Rao: Well, I do not think so. Trump uses tariffs as a punitive instrument. So, we do not know where the final one is. Yes, he believes in it. He thinks US needs to level the playing field. It is an unfair playing field right now and he believes tariffs will even the field. So, we do not know yet till it happens, but at this point the tariffs are still going to be on the table, so at least till the final outcome is decided. So, we will wait and see. But what I am saying is it is still moving parts. It is moving in the right direction. But let us see what the end game is. Let us see what US gets out of this whole thing. But at this point like I said it is still uncertain.
But tell me what is it that you make of all those recessionary fears. The tariff talks at least they are headed in the right direction, at least they are not now sort of a dead end or locking horns as they were earlier. They seem to be negotiating and it is progressing well so to speak. I mean, just last evening you had the World Bank actually cut the global growth outlook to now 2.3 from the earlier 2.7. What happens to that part?
Santosh Rao: Yes, tariffs in general they are not good, they not constructive. They slow down things. They have a domino effect. They have a knock-on effect across the economy. So, I do not think you want unfair tariffs on the table. So, recession is not on the cards. As far as the US is concerned, the economy is still good. Job market is still good. So, let us see what the CPI… The CPI is coming down towards the Fed's target of 2%, still not there yet, but it is coming there. So, let us wait and see, like tomorrow's number is going to be or the next CPI number is going to be very closely watched. If it is a good number, then the rate cuts in the next meeting are off the table. But if it is a soft number, Fed with the employment number in pretty good shape and cost coming down, their dual mandate is taken care of, so they might cut one rate.
ADVERTISEMENT I am in the camp of two cuts this year towards the later half of the year. We will get there at one point. At this point, he is just going to be wait and see after tomorrow's data, but then later on he is definitely going to look at it because Trump is after him also, he wants the rates cuts also, so he believes it is very punitive to the whole economy, so lot of ifs and buts, it is wait and see on the part of Fed, but tomorrow's data is going to be very important and the employment numbers, the unemployment claims are going up, let us see if it stays there, that is also being closely watched. So, a lot of things to watch at this point. Let us wait and see.
ADVERTISEMENT We did touch upon the tariff talks, inflation, and the rate cut expectation. But what about the markets? What is that you are pencilling for the US markets because of late for the past three to four trading sessions, they have been consolidating in a very tight range. Is this indicating a bit of a nervousness in the market or do you believe this consolidation is healthy before the next leg run up?
Santosh Rao: Yes, the tech is back. I mean, the Magnificent s are back, the so-called Magnificent 7 are essentially back. Semis are back in play. For a while it looked like they had run its course, but latest talks from different companies showing that there is tremendous demand for it. AMD also showed that. So that is not any issue about demand there. The supply is also pretty good at this point in terms of the semis and the other areas as well are okay.
So, as long as, the consumer holds up and the consumer demand holds up and the enterprise demand holds up which it looks like it is at this point, the earnings expectations for this year as of now looking at the latest consensus estimates is about 7% to 9% earnings growth for this year for S&P 500 EPS growth, so that is a good number. We came into this year thinking it is low teens, but it is 9% to 10% is also good.
ADVERTISEMENT It depends on different estimates but generally I have seen 8% to 10% anywhere between there, so that is a good number I would say in terms of earnings growth. So, if we can get good earnings growth, the tariff talk subsides, then the companies have better visibility into giving guidance for next year, I think that will be a good thing and we will get some clarity and the market will go up. Right now, there is uncertainty, people are holding their cards, they do not know where the tariffs will land and all that stuff, so no recession on the cards but definitely a slowdown if the tariff does not take the right shape.
While we are talking about the bigger picture here, I have to ask you where do you think India stands amid all of this because even after the frontloading that we have seen from the RBI, you have the World Bank that had still retained its 6.3% GDP target for FY26 in India. This comes after they had slashed it from 6.7% in April. So, amid everything that has been going on globally in terms of US, China, where do you think India stands right now?
Santosh Rao: India has been in a good position all along. On a relative basis, it has been very strong and it continues to be. It has tremendous consumer demand. The government is doing very well. It is telegraphing its intentions very well. I am glad the war ended and did not disrupt too many things at this point. So, they need to keep their eye on the price which is growth and go move towards increasing their size of the economy. So, India is doing the right things. They are going in the right place.
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So, I do not see any reason why they should be hurt and even the trade negotiations, India has a good bargaining position there as well because Trump needs a deal and India can definitely get what it wants from Trump at this point. So, the trade deal with US will be beneficial to both. So, net-net, I see a good tailwind as opposed to headwinds for the Indian economy.

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