The decision by President Trump to impose higher import duty on steel and aluminium has created the threat of a full-scale trade war if the EU, China and Japan take drastic steps in response. And if that turns out to be the case, inflation could well make a comeback and directly set off a stock market downturn.

The Dow and S&P 500 registered more than 1 per cent declines in just a few days after Trump’s announcement raised concerns that it could impact on higher import prices and a prolonged trade war. The declines put the Dow into negative territory for the year and drove the Volatility Index to its highest close since February 13, denting the market’s recent recovery from deep losses in early February.

If you look closer at the US position, there is no harm in Trump’s thinking. He got to be the President on the basis of an agenda of increasing employment. Prime Minister Narendra Modi has been just as engaged in promoting the “Make in India” campaign.

But Trump has taken those extra few steps to promote domestic manufacturing … and triggered stock market losses globally.

Looking at the Indian stock markets, the growing non-performing assets of banks and the Punjab National Bank scam were the main reasons for the recent shake-up. A large number of small share flotations have come on the trading floor and facing intense pressure for sell-offs.

There are blue-chip stocks available at even half the price from its highest level.

Despite a strong foundation, the sensitivity index of the Bombay Stock Exchange has dropped by about 10 per cent from its highest level. Nifty’s small and mid-cap index has take a fall of more 15 per cent from its peak.

In such a scenario, small investors should avoid going directly into the equity markets. At the moment, it would be wise on their part to create a gap in their investment flows in the market. If the selling pressure persists or turns intense, the Nifty can break up to the 9,500 level.

That is, a decline in the market of 8 to 10 per cent. Only in some cases can this level be an opportunity for a retail investor. Do not, under any circumstances, put all of your funds together.

Only invest 20 per cent of the available funds as a first instalment. You can buy into a decline whenever it happens. If you have an existing investment, then profit recovery from the current levels can be a better option.

You can invest this fund again after a bigger fall. But at the broader level, I would still insist that smaller investors should keep away from equity at the moment. If you still feel the need to do so, then opt for mutual funds.

Or if you are investing in equity through systematic investment plans, then continue to do so. But where possible, refrain from making profit bookings. If you have an exposure in equity, then it is best to do so over a longer term.

At the end of the day, when there is sudden rise in the risk profile of stocks, the safe-haven status of gold will come into play again.

— The writer is Associate Director at SMC Comex.