The temptation to brood over the current market mood is high, this has been one of the toughest market phases we have experienced since 2018-19. When nothing seems to be working any more, one can only fall back upon a time tested process that has held up well through previous correction. It is the right time to get analytical and get our checklist out, for we have used this in this past corrections productively.
- Are the headlines printing “worst week/month in many years?” – Yes
- Does the macro news flow make India look like a hopeless investment destination? – Yes
- Do we see unambiguous signs of investor despair? – Yes
- Have the strongest stocks of the past 12 months finally taken a tumble? – Yes
- Do we see negative double digit historical return on key indices over shorter timeframes? – Yes
Now coming to some nuanced questions –
- Is the current price damage the first episode of its kind over the past 2 years? – No
- Does this steep price correction follow a time correction? – Yes
Going by history, the current market texture meets most conditions needed for good investing outcomes from here over the next 2 years. A steep price fall that follows a time correction phase has the tendency to force out many strong hands too and not just weak hands. Our reading is that the market now meets our criteria of a “fallen market” and not just that of a “falling market”. We now see some stocks that are trading well below their 10Y average trailing PE multiple, we also see a few stocks where the cash equivalents on the balance is sheet is ~50% of the current market capitalization!
The narrative of “stay safe in large caps” has been decisively punctured through the fall this week. Some of our own best performing stocks over the recent past have seen a price damage of ~15% in this week alone. And some of them are proven market leaders in their segments that are likely to deliver earnings growth of > 20% over the next 12 months. And at a market capitalization of > 50,000 Cr to boot. This sums up the current state of the market and we cannot think of too many similar situations we have dealt with since 2019. When the strongest stocks fall on overall market pessimism (probably because investors are booking profits wherever present), this trend has usually acted as a reliable sign of a peaking out of investor pessimism.
Will this time be any different? We should know in a few months
For investors who have the ability and the willingness to take a 3 year horizon from here, the next course of action should be rather obvious. After ensuring survival over the immediate term that is. One should not exceed the outer bounds of the asset allocation template just because prices look mouth watering. This discipline needs to be maintained even in the current situation, even if your view is extremely bullish from here.
Investors need to have a nuanced view on whether one wants to exhaust all cash quickly or would it be a good idea to wait for stability before committing fully. The nuance that we need to keep in mind is that a long drawn time correction needs a patient approach. Before the steep fall of this week played out, our answer would have been to space things out rather than commit fully right away. But with this bout of price damage this week, we aren’t sure if the market will give investors too many opportunities to catch the first 5-10% up move in stocks, whenever it happens. Sharp price falls that are driven by fear of external factors are usually followed by sharp relief rallies that shock investors with their ferocity. The first few price up moves are met with disdain with few investors trusting the sustainability of the up move. It is only after individual stocks move ~15% from the recent bottom that investors start considering the possibility of a new run.
The intent is not speculate here but to drill deeper into how the market behaves once peak pessimism is priced in. It is easy to say “I am happy to miss the first 10% of the up move” but please be aware that you will most likely not have clarity even after the first up move is done. Taking an exit now and waiting for things to settle down before deploying money sounds simple but is exceptionally difficult to execute well for this reason.
Our suggestion is that investors should do some soul searching and establish that they indeed are deploying incremental capital with a 2 year+ horizon while being prepared for more downside immediately. Once this is in place, we see no point in playing it too conservatively from here. At least 50% of the balance cash needs to go into your chosen set of funds/stocks closer at the current market level. The balance cash can be deployed as you get more clarity/conviction but it would be meaningless to take baby steps right now and operate in tranches of 5-10%. One cannot get superior investing outcomes without risking the possibility of being wrong. Playing it too safe usually results in average or below par investing outcomes.
The pace of the price rise in crude oil has caught many by surprise, to some extent the current panic is understandable. For the longest time, India’s biggest fragility has been crude followed by our penchant for buying gold. If the environment moves towards sustained higher prices on both crude oil & gold, the current account deficit of India will once again start making the headlines. But more importantly it will first cause more mayhem in the USD-INR, and it s very difficult for FPI’s to commit capital to India when the outlook for the INR looks bleak in the short term. The hope in January was that a successful conclusion of the US trade deal will put a floor under the USD-INR pair but that joy was short lived. The Dollar Index (DXY) has started to trend up once the Iran incident started and this has put further pressure on the INR.
But we must keep in mind that the situation always looks the darkest before the eventual bounce back. Investors will do well to remember that 60 days of elevated crude oil price is not going to change the medium term dynamics for most sectors. The short term will obviously see disruptions on RM pricing and energy availability for resource hungry sectors. Sectors like cement, ceramics where power & fuel cost as a % of revenue exceeds 20% might face the brunt of it in March and Q1 FY27 until the situation stabilizes. The market will watch for signs of whether the elevated crude oil price will be an affair that lasts for weeks or months in 2026.
While we do believe that the way the world has been co-existing all these years is unlikely to be the same going forward (thanks to the antics of the current US regime), we also believe that the market will get fatigued of negative geopolitical narratives over time. The issues that got the market worried in the 2022 don’t even make the headlines today. Markets, prices & investors move onto newer narratives – that is what they eventually do. So long as capitalism drives the world, investors will compete with each other for higher returns and ensure that a boom cycle will follow difficult times in the market.
The other bet to make is that India has traditionally taken aggressive market friendly measures only in the face of a crisis. By all means, the current geopolitical climate has brought to the fore many mini-crises, if not all massive one like the COVID outbreak. The policy makers staying silent while the INR goes into a free fall has caught many by surprise, but the counter to that is that a weaker rupee mitigates the effects of tariffs to a respectable extent. If the West Asia crisis turns out to be an affair longer drawn than expected, there could be some strong policy measures coming through to assuage investor concerns.
At the same time we need to reconcile to certain challenges. Some of the highly valued & well represented sectors in the market are unlikely to deliver double digit growth over the next few years. With earnings growth lagging 15% p.a. in these pockets, it will affect the expected return from the NIFTY 50 over the next few years. India’s market structure is not conducive for a repeat of the 2003-07 period of earnings growth of > 18% p.a. at the NIFTY 50 level. India will need to find new growth engines over the next few years, that the profit pool will pivot to other pockets is very likely from here.
Before we get all gloomy about the Indian market, there are some positive takeaways from the Q3 FY26 earnings season
The BSE 500 universe grew revenue in double digits (YoY) for the first time in 3 years
Auto sales have been excellent across the board (both primary & dealer level) since September 2025. CV, tractors, PV and 2W segments are all doing well
HRC prices moved up by 6-7% from the December bottom in January itself following the imposition of ADD. We have a situation where Indian steel makers are looking at better balance sheets and excellent cash flows over the next 3-5 years
Indian pharma & CDMO players are getting more integrated into the global GLP supply chain. This is one industry where India is a serious player and our capability as a nation is only getting better, it does suffer from doubts on terminal value that is currently plaguing the IT industry
The theme of import substitution across electronics continues to pick up pace. This is by far one of the more serious attempts by the Indian Govt to correct the balance of trade in a few sectors where policy action can make a difference
India’s stature in the world has taken a leap post May 2025. So many defense & aerospace related businesses are boasting of order books that offer a 5 year+ growth visibility. Some of them are selling to marquee names in the export sector
India’s policy makers pulled out two bazookas in 2025 in the form of Income tax regime change & GST rationalization. Both of these are yet to be seen objectively by investors since the market mood since April 2025 has been dominated by geopolitics rather than economics.
We continue to broaden our coverage of sectors and businesses and we sometimes get pleasantly surprised by a few things we read about. We are finally at a stage where the business valuation (in general) is starting to surprise us positively, though the current portfolio price damage doesn’t give us much to cheer about. Some businesses across the defense, aerospace and data center themes looks interesting if they were to participate in the current correction after holding fort for many weeks now.
So many businesses that we got tempted to buy into over the past year are today available at prices that are 20% lower. The market taking a turn for the worse towards November end told us to avoid needless changes in the portfolio. For most stocks have fallen, we don’t see too many pockets where investors could have sought refuge due to relative strength. Whatever didn’t fall over the past 5-6 months has finally fallen this week. 15% gone in no time, such has been the price damage. Rotating out of weak counters into “strong counters” in January would have worked against you in the March fall. Since March 1st the NIFTY has fallen 8.1% while the NIFTY MIDCAP 100 has fallen 7.4% and the NIFTY SMALLCAP 100 has fallen 6.1%.
Investing is never easy because of market phases like the current one. Conviction and patience are easy to talk about but are difficult to execute in the face of relentless price damage.
No matter how experienced one is, such market phases are difficult to deal with.
Process over outcomes is the only way around, and the only way around is sometimes through it.