Getting 2008 feels again? After the mild hope of the March 2025 rally, April has been brutal with hardly 1/4th of the month gone by. Feels like gloom and doom time, but we shouldn’t lose sight of certain factors.
First up – What is spooking the market?
- Direct impact of Trump tariffs on Indian businesses
- Direct impact of the tariffs on the US economy, growth & demand
- Redefining of trade & business equations, dislocations in supply chain and the fallout of these
Most of you would have read/heard enough content by now on how (1) is the easier part to address. The Indian Govt has been working behind the scenes for some time now, preparing for this expected salvo from the US. At some point of time, a deal will be announced that should be able to quantify the direct impact. (2) is the tougher part to assess, one can only react to whatever is the outcome. Thankfully, India has a vibrant domestic consumption market that doesn’t rely on external factors to a great extent. (3) will be the most interesting part of the current puzzle since dislocations tend to generate opportunities and a new set of winners. Before you get too deterministic about anything, do remember that there were murmurs of the death of the Indian IT Services industry in 1999 once the Y2K problem was addressed.
Adversity brings with it opportunity, if only one is willing and able to focus on it. There are some positive developments that are happening in front of our eyes, if only we take our eyes off Trump for a few hours. Just to reiterate some of these –
- A supportive stance from RBI after staying hawkish for many quarters. Both on liquidity & lending norms
- OPEC has announced supply enhancement, in the process surprising many. Crude is now in the 60’s and lends a much needed supporting hand to both the fiscal & trade math of India. You can pull out the Oil spending bill of India for FY24, FY25 and assess how much of saving can accrue if Brent Crude stays below USD 70 per bbl through FY26
- India manufacturing PMI numbers getting better sequentially after the lull of H1 FY25
- Personal income tax rate cut should start putting more money in the hands of salaried employees from April end
- Expected interest rate cuts by the RBI should reduce the domestic cost of capital. The pace of rate cuts could be quicker than initially anticipated
- Trump is pushing for lower rates in the US, if he succeeds it can support asset prices once the current panic is done
- India is relatively better placed compared to other Asian peers, China will face the brunt of Trump’s actions and will have it’s hands busy for many months trying to deal with the fallout
The biggest point to note is that even those who are secularly bearish on equities (Indian) right now still believe that India will grow out of the current situation, it is just a matter of time. This domestic capital is edgy, nervous capital that will look for reasons to hop onto the equities train the moment they “feel comfortable”. It is perplexing that many of them believe they can hop off and hop on in a timely manner though every data point out there points to the contrary. Nevertheless, it is what it is and it makes the market an interesting beast at any point of time. No one is worried yet about the India story getting derailed due to the recent developments.
Of course, there are worries. The journey is unlikely to be smooth or linear from here. What has kept the equity market up since the 2008 GFC is a ready supply of liquidity and low rates from central banks. Every time there was uncertainty on the horizon, central banks would pump in liquidity and kick the can down the road. The biggest worry that has emerged in the past 10 days is that there might be no more kicking the can down the road. Which means there will have to be pain upfront in dealing with the situation before things stabilize. Which the current US regime has been very vocal about. With limited possibility of liquidity infusion from the US Fed and the threat of unsustainable debt levels continuing to loom, valuation multiples can see a steady compression for years. The “25 PE is reasonable” narrative that we have taken for granted in India since 2016 has taken a dent already. Those who were in the markets prior to 2016 will recollect that the “30 PE stocks” of today were just “20 PE stocks” then. Mean reversion of valuation multiples can put a lid on equity returns, even if earnings growth is healthy over the next 2-3 years. Domestic cost of capital is still higher compared to the cost of capital for FPI investors; if the ownership structure of listed India further pivots away from the FPI’s, this factor can steadily creep in without us realizing the effect of this initially.
One of the positive risks right now is that the US regime can play mind games and make announcements out of the blue. Every psychologist will tell you that bullies tend to let up a bit once they see that others are acknowledging their dominance. One single statement from the White House that hints at a much saner tariff rollout schedule can send shorts scampering in no time. When bearishness is at its peak, short squeezes are common – even if they aren’t long lasting. There are so many variables at play right now that it is futile to get deterministic in either direction. Go back to the 2010-20 era when the market would flip on the basis of one single word in the central bank minutes. The US Fed would change “considerable” to “significant” and the market would swing 5%. Just that the actors have now changed – Govt policies have taken centerstage with central banks relegated to being sidekicks.
My personal take is that the current US regime is very motivated and they believe in what they are doing. They tried to impeach, attack and even take out Trump but he came back stronger every time. He is probably way smarter than we give him credit for and has been consistent in his thoughts for more than 3 decades now. One of the subtle things I understood as a wealth manager for the super rich in India is that successful men past the age of 70 don’t give a rats ass about other people’s opinions. They only care about their ideology and their legacy, if such a man is on a mission he would rather perish than change his world view. The next 3 years should be very interesting as Trump pushes further on his agenda to change how the world’s affairs are conducted. India is in a good position to extract mileage from this, I only hope our Governments are smart about this and capitalize on the many opportunities that are coming up in the future.
It should not be surprising if investors start making a beeline for domestic heavy business models like lending & consumption from here. Both the sectors have their own challenges but any positive news or better than anticipated numbers can send stocks higher in the due course. The time to do focused work and be ready is now. Ideally you should already know what you want to buy in each sector the moment uncertainty cools off a bit.
Ideally, one should have created some buffer in the portfolio through the past 6 months. Cash during such times gives you dry powder, so that you do not have to sell when the price isn’t in your favor. Asset allocation is much easier to do a decent job at than portfolio management, that should be the starting point for investors rather than trying to do sector and stock rotation based on Relative Strength. Choose endeavors where the base rate of success is high. Sector and stock rotation are easier said than done, just ask the junta who saw high RS in IT stocks till December and loaded up there.
One of the interesting aspects of the current bout of selling is that some stocks where Q4 earnings are likely to be excellent are being sold off too. Just imagine what can happen if the market gets some comfort on the tariff angle by the time Q4 results come in and these stock prints a 40%+ YoY growth number. One must zone out today before taking impulsive decisions just because prices are falling. After making sure that you can stay the course that is. Don’t make lofty long term plans without ensuring survival over the short term.
By the time this saga is digested and the market is stable, many of us would have made a set of avoidable mistakes all over again. Most of them are caused by staring at the screen too much and by counting losses multiple times in a day. Unless you are a professional money manager no one cares if you beat the index or underperformed it. Just get the basics right and keep calibrating to the market as and when new information becomes available. If one were to keep score and stare at dashboards on a weekly basis, most things would break down – personal relationships, entrepreneurship & real estate investing included.
Before you get excessively bearish on equities, do remember that the richest people all got there through equity ownership. These were the largest shareholders in a business that ended up doing well over a decade or so (just that they were also operating managers). Their operating skills were clearly great but what put an insane amount of money in their bank account was their ability to stay the course with a high chunk of their net worth tied to a business that was executing well. This is one of the basics we tend to forget when the market is falling 2-3% every day. We foolishly believe that there is always a far better deal out there and that we are good enough to keep finding such deals regularly with a high strike rate.
Do remember that when you keep jumping ship in the face of adversity, you are telling yourself in a subtle manner that you do not have enough belief in your own judgement. This doesn’t mean that one should not calibrate to a changing market but selling 15/20 stocks in every bear run is not justified most of the time. Just get your asset allocation right, ensure that you can have a peaceful sleep and trust the process that has been proven to work across cycles. Every serious market correction will always boil down to the same thought process, even if each market correction is caused by a different set of variables. If in doubt, go through this post of mine from March 2020. Same higher principles at work, just that the cause is different. In such times a game theory lens is a useful tool to have. While many bottom up stock pickers hate focusing too much on macros because it rarely results in tangible action items, one should not be guilty of drilling deep without paying attention to the topography in which you are operating.
The rest of April should be very entertaining. Keep an open mind and resist the temptation to get deterministic on how things *will* play out. You may watch youtube videos and read opinion columns but do remember that they too are only guesstimating. Go back to all of the possibilities discussed in March and April 2020 and ask yourself how many of them actually played out. Speaking about possibilities is the easier part, putting your money where your mouth is will always be tough. Don’t let someone’s quest to be seen as an intellectual or some bloke’s engagement farming strategy affect your investing choices. Let your actions be measured & calibrated, not knee jerk in nature.
The battle isn’t just external but internal as well for investors. That’s what makes a 20%+ CAGR over 10 years so challenging for most investors. Many have the IQ but few have the stomach. Emotional restraint and control are an integral part of investing, especially closer to market peaks and troughs.