In my last post, I had outlined my idea of being bearish on the markets and reasons thereof. Since then, we have had some correction in the Indian markets and some large moves in multiple global markets- Natural Gas, Japanese Bonds, Silver, etc, all of which has led to the Episode 2 of our original post.
A. First, a quick look on how things have progressed on various fronts:
1. Geopolitics- The gathering at Davos this year has been incredible. Canada sounding a somber note on the death of rule-based global order; France lecturing the US; EU announcing the mother of all deals with India to counter US tariffs and a lot of bickering between various NATO members. At the top of it was the public humiliation of Denmark by US Treasury Secretary, EU by its Commerce Secretary and of everybody else by Trump along with a renewed claim on that piece of ice- Greenland.
Unbelievably, the infighting along with imposition and then repeal of additional tariffs on European nations by the US has only heightened our case that we are in a time of major flux, with a flurry of events only reminiscence of those leading up to the Second World War. It is incredible that until the beginning of this year, nobody was even thinking of 1939 but now everybody is picking up their history books to draw parallels from the famous decade of 1930s, both about the Great Depression and the Great War.
2. Markets- Indian markets possibly took our piece a bit too seriously and collapsed quite a bit throughout the week with multiple accidents- Kalyan, Havells and what not. Most importantly, people have begun to appreciate the idea that an overvalued market can fall 20-30% and still remain a lot above fair valuation. What has unfolded is a race to exit first before the fire breaks and if the fire does break out, there will be no exit, especially in times of heightened MTF positions.
B. With our cash positions, we are incredibly bearish on this market. I have been in this market for 9 years now and hasn’t sat on a rupee of cash until now where it is our largest holding at well over 66%. It also means that our views are going to be incredibly biased, and you must remember that while reading this. Why do I take such a call is what I am trying to elucidate. So what are we seeing here:
1. The valuations- You look anywhere and 80-90% of the market looks expensive. Every story is discovered, every position primed for forever growth and there is almost consensus buying on multiple themes with a lot of money chasing a forever supply of stocks from PE funds, promoters and FIIs. I do not understand the thesis of chasing a stock like Zomato when the Promoter exited the company and people praised his leadership skills and clear communication.
Most importantly, the usual chatter of how LTCG and STT killed the markets and scared away the FII has now begun to flood the conversations on TV and X. Prominent fund managers, including the likes of Samir Arora who holds a ton of Paytm, Zomato, Physics Wallah type are now crying left and right to pressurize the government in doing away with LTCG or else havens will fall.
Ask yourself two things. Post imposition of LTCG in 2018, did the Indian market not see the biggest boom ever in the stock markets between 2020-2024? And two, when the market was going up, did all these people not tell you that the FII money is not required and the local money is self-sufficient in keeping up the markets and even sustain a bull run on its own. In that case, why are they crying now?
There is a barrage of such people who are writing long posts about how the poor retailer is hurting; how he is in loss because the FII have vanished from the markets and why you desperately need to lower/remove these taxes to bring back a sense of semblance in the markets. I call these people bullshitters. They are forever on TV in a self-congratulatory mood when the times are good- one guy can’t stop telling how he bought Hero Honda in 1990s, the other one is the first ever multi-bagger hunter in Infosys and there are a multitude of them who forever are outperforming the market and who have always caught the stocks which have gone up recently.
When the times are good, they hail the retailer for SIP culture and how Sensex will be 200000 in three years and so on and so forth. The moment market turns; they cry foul. Do yourself a favor and watch some CNBC or Zee Business videos in the last week of March 2020- there was an entire gang of fund managers and leading market experts who wanted the government to shut the market down because their portfolios bled. The same guys now are desperate for a tax reversal because their trend following has led to lower returns and their clients have stopped pumping fresh money. They want you to believe that India is the biggest and the best market in the world and government should be out of business but the moment there is a fall, leave aside a bear market, they want the government to bail them out! Bullshitters!
The problem with Indian fund managers is that most of them are momentum chasers. They will all chase the same thing- Kalyan was a darling till very recently and so was Dixon. Call up the people who were extolling virtues of Zudio till last year to see if they would love to buy Trent at half the price? Where are the people who called IRCTC the best monopoly business in 2021 or sold the China+1 story to believing public or who would buy Cochin Shipyard at ₹2900? Funnily, the same bunch now wants you to invest in China!
All the PMS people are now running their mutual funds because that’s where you can accumulate the highest assets and all one has to do is to mirror the index, add a lot of fancy stocks and claim to outperform the markets on CNBC.
Funnily, as the Indian markets underperform, those selling you the latest Defense and Manufacturing thematic funds now lament the fact that most Indians do not invest sufficiently across global markets and how they are missing out on the deal of a lifetime. They will then pull out the valuations of Nestle in Europe, Unilever in England or LG in Korea to tell you that the parent is cheaper than its Indian subsidiary.
Well, two points. One, most Indians cannot invest in global markets due to frictional cost involved and the LRS limits set by the RBI- $250K per annum and the TCS involved therein and two, these very people wanted you to keep buying the LG IPO or the Nestle-Lever shares as long as the market kept going up! Further, most Indian mutual funds offering global investing are nothing but a Fund of Fund ETF of either the NASDAQ or the S&P with hefty fees which nullifies a large part of the return.
2. This is just the beginning-
The Indian equity market is in the sixth year of a long, secular bull market where people made a lot of money. Until the beginning of this year, I also believed that there is one final hurrah left before the cycle turns but the flurry of IPO and promoter selling along with the geopolitical setup has convinced me that the fall is here and now.
If you see carefully, over the past few weeks, the selling was first in the EMS space with Kaynes and Dixon beaten black and blue and last week it was the realty index which took the most beating. There were multiple other accidents as well- Kalyan, Havells, Adani group, etc. So, what I think is that people are first selling wherever they have made the most money or have some profits left. Once that subsides and if the index does not recover, there will be a sharp fall across the broader market. Of course, this doesn’t always happen like this but to my understanding, the fall has just begun. If you look at any stock which is down 30-40% from their previous highs, most likely it is still trading at 60-80 PE multiples.
What I learnt from my experience of 2018-20 is that a stock which is down 30% from its 52 W highs can still fall 50% and still go down further in a bear market. If you read my very first few posts, I had recollected that I first bought Tata Motors in 2018 at ₹430 levels. By February 2019, it was ₹150 and during Covid it fell to ₹60!
So, a lot of you think that buying something which is down 30% or even 50% from its lows is a good bargain should remember that in a normal bear market, even good stocks fall 70-90% from their peaks. BSE alone has fallen 60% at least twice since its IPO in 2017 and has fallen 40-50% multiple times.
As far as the indices are concerned, they are hardly down 5% for Nifty and 13% for Small cap index. They are still up to 20% above their 52W lows and the ones claiming that a bottom is near has forgotten not just 2020 but even 2022 and February-April 2025! It is very normal for even Nifty to fall 15-20% in any given year and it won’t be a surprise that we see a sharp drawdown across major indices over the coming few weeks. Yes, there can be a sharp reversal in case the budget does take out the LTCG or if there is any positive announcement on the US tariff front but to my mind, that will be temporary as the FII will happily return to sell at elevated levels and the flurry of IPO will only accentuate.
If there is a sharp reversal in the markets, I will be happy to go upto 90% cash as there is nothing better than watching the madness of crowds unfold. I have a very clear rule in this market; If we fall from here, there is a chance that the fall will be limited to let’s say 30-40%; in case the markets go up in a hurry, the fall from there will be far more brutal.
As far as the retail money is concerned, if you suddenly see the number of funds setting up offices in GIFT city while trying to sell you the dream of a globally diversified portfolio indicates that the tide is turning. People who used to ridicule gold investing are now offering multi-asset funds with a large portion of it in gold to somehow keep up with the returns generated therein.
3. Geopolitics trumps Markets
If there is one take away from the events of this month alone, it is that the world we knew has ceased to exist. The Europeans blocked the Russians out of Europe are now staring at an unravelling of NATO. The US which preached to the world is now bickering with Canada. India is also at a position where it must balance a lot of things to keep moving forward and I am happy as an Indian that we do have sensible leadership at the helm. It is no secret that the Deep State wants an unstable India because if you can create some fissures now, the 7% GDP growth can easily become a 4% growth with 8% inflation. In that respect, I also believe to a point that the FII selling is strategic and I am sure the government also understands this.
At the time of writing, the US is moving its warships to Iranian waters and who knows what happens next. There are just too many things waiting to blow up that every nation is now cautious of the next step. For those of us waiting for a trade deal with the US, ask Europeans. They bootlicked Trump for a deal in 2025 only to be told at Davos that they can have even more sanctions coming their way again! If I can see this clearly, I am sure our leadership also does that you just can’t trust anyone anymore, even with a signed deal!
It is logical for the government to do two things- keep the domestic economy going and maintain the lid on inflation. So I would imagine that the capex push will continue, subject to fiscal situations and any tax cut is simply out of the equation. The government simply does not have any room left, especially with the IT and GST cut. Yes, if anything does happen, it can be a raise in LTCG to 15% with a higher exemption limit to let’s say ₹2.5lakh rupees per person.
4. History does not repeat but it rhymes
In my limited career in the markets, I have seen the small cap index collapse close to 60% between 2018-2020 and funnily, people have a short memory. There used to be market darlings such as DHFL, PC Jewelers, Gitanjali Gems which all fell over 99% during that period. Yes Bank, the then market favorite fell from ₹400 to less than ₹7, well over 98% fall. The OMCs were market darlings in that period until Arun Jaitley levied ₹1 oil cess in October 2018 when IOC tanked 30% in a single day and fell close to 60% between 2018-2020! Vedanta also fell from ₹ 400 to just around ₹60 and I can go on and on.
What I am trying to tell you is that it is very normal for stocks to correct 50-70% in a decent correction while a lot of stocks will never see those prices again. It is good to remember that Reliance Power, Reliance Communication, JP Associates, Jet Airways, Suzlon etc were part of the bluest of the blue chips in 2008 bull run and most were part of Nifty 50! DLF has not crossed its 2007 high even in this bull run while UniTech and the likes went bankrupt.
It is not a bad time to revisit history lessons while preparing for a long career in the stock markets. If you go back a few more years, you will witness even worse periods with even better storytelling. In 2007-08, India was the next China with multiple decades of 9-10% GDP growth rate ahead of it because we had decoupled from the USA and have easily survived the great recession. Nifty made a high of 6500 in 2008 and did not cross it meaningfully until 2014! The US markets which is the best performing market currently also gave birth to the Internet just as it did to the AI. NASDAQ did not take out its 2000-01 peak until 2010! So much for American exceptionalism.
C. To conclude-
To make money over long-term, you have to flourish in a bull market and survive the bear market. To make lifechanging money, you not only have to ride the winners of the bull market but also have some firepower to invest in a bear market when the prices are so low that a normal recovery will give you a 2-3x on portfolio, turbo-charging your returns. The prices can be so low that you can’t fathom but the key is to have cash and courage to invest at that point. I believe that a massive downturn can be the biggest opportunity of our lifetime. I am neither aware nor have any ability to predict when such a fall can happen but let me give you a small chronology:
In May 2019, Nifty crossed 12000 for the first time. Three months later, In August 2019, the Government cut the Corporate tax rate. Nifty subsequently made fresh highs of 12430 in February 2020 but one month later, the markets were down 40-60%, depending on the indices you wish to monitor. In this period, small and mid-caps were already down 30-40%. Fast forward a few years. Nifty’s previous high of 26000 was in September 2024. In 2025, the government has cut both the Income Tax as well as the GST and the markets have also made fresh lifetime highs as recently as January of this month. The average small-midcap is also down 30-40% from its peak. I don’t want to predict anything more than this!
Life is all about Compounding! 