Do it yourself

For the past two weeks my message inbox has been flooded with messages highlighting that recently “Hindenburg Omen Signal”, which preceded the 2008 and 2020 stock market crashes, has been triggered and a stock market collapse may be imminent. There are several other technical and strategy reports cautioning investors against an apparent bubble in the Artificial Intelligence (AI) related stocks.

Hindenburg Omen Signal: The Hindenburg omen is a technical indicator designed to signal the increased likelihood of a stock market crash. It compares the percentage of new 52-week highs and new 52-week lows in stock prices to a preset reference percentage (typically 2.2%) to predict the increasing likelihood of a market crash. The indicator is said to be suitable for about 30 days out, though it's been a false alarm more often than not in the past decade. Four criteria must be met to signal a Hindenburg omen:

·         The daily number of new 52-week highs and 52-week lows in a stock market index exceeds a threshold amount (typically set at 2.2%).

·         The 52-week highs can't be more than twice the 52-week lows.

·         The stock market index is still in an uptrend. A 10-week moving average or the 50-day rate of change indicator is used for this.

·         The McClellan oscillator (MCO), a measure of the shift in market sentiment, is negative.

How to think about the new Hindenburg Omen narrative

A common problem with the popular market discourse is that every meme indicator that worked once… becomes religion forever.

Hindenburg Omen is just a market breadth anomaly flag that is used to indicate stress emergence — not crash certainty.

Historically, some major crashes were indeed preceded by such a signal. However, false signals have massively outnumbered true signals. The probability distribution is not deterministic. Actually, it is more of a trend change watchlist input — not a trading instruction.

The more important debate now is actually different

The more important debate in my view is “Are AI stocks a bubble or are they discounting the future correctly?”

AI is now the most consequential capital allocation variable in the world — influencing geopolitics, capex, energy security, employment, corporate strategy, national strategy.

But here is the inconvenient fact for India:

·         India has no pure-play AI company.

·         This is not our NVIDIA moment.

·         This is not our TSMC moment.

·         This is not our Google / Meta / Tesla moment.

Our listed exposure is basically:

IT services riding implementation side revenue + consulting banks / logistics / enterprises consuming AI to enhance productivity So in India the AI debate is limited to “IT attrition, pricing, margins”. That is not the real debate in global markets.

The core portfolio question:

In my view the correct frame of reference for Indian investors is – “If global AI bubble were to correct — does India outperform or not?

Indian investors therefore may be better evaluating:

·         October saw FII flows turn positive and several respected global strategists are talking India long duration bull. Is this early 2026 positioning?

·         Have Indian valuations reached the band where global capital actually prefers to hide in India if US/AI corrects?

·         If there is a global risk off — does India fall with them and rebound faster (like 2008-09)… or does India do better in BOTH the fall and the rise?

In my view, instead of predicting market crashes, and consequently taking rash decisions, we would be better off by building antifragile portfolio architecture. For example-

·         Distinguishing between narrative premium vs earnings premium

·         Reducing leverage dependence for performance

·         Moving portfolio factor weights slightly more toward compounding engines, less to short-term momentum chasers

·         Using corrections to accumulate structural compounding themes, e.g., manufacturing formalization, infra development, energy security & efficiency, domestic financial deepening and up-trading in consumption.

Conclusion

Hindenburg Omen is useful… not because it predicts a crash — but because it forces you to re-test the strength of your portfolio design under adverse breadth conditions.

It is not important to forecast whether India will underperform or outperform the global markets. The important thing is to not panic trade technical omen memes — and instead use signals like this to calmly strengthen the probability of multi-year compounding.

The first three weeks of the FY26 have been rather dramatic for the stock markets. By the end of FY25, the benchmark Nifty 50 was down ~10% from its previous high level recorded in September 2024. Foreign investors were selling persistently. News flow from any quarter was not particularly encouraging. Investors’ sentiment was sagging. Market volumes had plunged over 30% from their 2024 highs. The rate of SIP discontinuation had increased materially, with March 2025 recording net negative addition to operative SIPs. Social media timelines of active market participants were filled with despondency.

FY26 started with the declaration of trade war by the US. Markets that were already reeling under pressure plunged further, with the benchmark Nifty 50 falling another 9% in the first five trading sessions of FY26. Anecdotal evidence suggests that many traders and small investors capitulated and liquidated their positions. Several others churned their portfolios to move to defensive sectors like FMCG, Pharma etc.

In a dramatic turnaround, Nifty 50 has gained over 9% from the lows of 7^th April 2025, erasing all the losses YTD2025. This is perhaps the most hated market rally since 2009. The participation has been poor. In fact, several investors/traders have used the rally to raise more cash.

In my view, the market continues to be in the process of forming a strong bottom and beginning a strong rally. It is early to conclude that a firm bottom is in place and a sustainable market rally is imminent. Nonetheless, the recent market behavior provides significant evidence to conclude that (i) fall from September 2024 was beginning of a bear market cycle (see here); (ii) bottoming process has accelerated with the April first week sharp correction; and (iii) contours of the new bull market have already started to take shape.

In particular, I would like to highlight the following trends to in support of my conclusion:

·         A clear leadership appears emerging, with private banks (+13% vs Nifty 50 +3% YTD2025) clearly leading the up move.

·         The up move is led by large cap stocks. Small cap (-9% YTD2025) and Midcap (-5% YTD2025) lagging behind in a typical early cycle trend.

·         Besides size wise category, sector wise - IT Services (21% YTD2025), Realty (-17% YTD2025), Pharma (-9% YTD2025), Auto (-4% YTD2025) – laggards are also prominent; usually a sign of market cycle transition.

·         A sizable number of market participants are still not confident about the sustainability of market rally; implying fear still dominates greed.

·         Implied volatility has remained low to moderate, except for a brief surge earlier this month.

·         Stock prices of capital market related businesses have recovered fast, indicating that the market participants are confident about the prospects of market activity levels picking up in the short to medium term.

I would also like to take this opportunity to mention the following ancient Hindu tradition, which I find most relevant to the investment strategy of household investors.

Hindu religious traditions mandate that a grand feast must be organized by all Hindus within 3 weeks of the death of their parents, spouse or children. In this grand feast Priests, Dogs, Crows and the poor are served with delicious food. Priests and the poor are also given clothes, gold, cash and other gifts.

Also, as per the ancient Hindu traditions, all Hindus are obligated to serve priests and feed crows during waning moon fortnight (Krishna Paksha) of lunar month of Bhadrapada. It is widely believed that serving priests and feeding crows in this fortnight pleases souls of the ancestors, and redeems the person performing this ritual from the debt of ancestors. I am not competent enough to comment about the traditions of other religions and cultures, but I am sure similar traditions are practiced by the followers of other religions also.

The lesson for investors in this tradition is that "the feast" (gains from investment) will occur regardless of you. In case you want to enjoy the feast (gains), you need to survive (stay invested) till the market cycle turns; otherwise, the priests (savvy investors and traders) will savor the feast at your expense.

Also read

Bull fatigue or bear charge

Swings may get incrementally shorter

Prepare for the spring

With the conclusion of the US elections, most of the noteworthy events for the current year 2024 are over. Though some traders may be looking forward to 23^rd November (Assembly election results), 6^th December (RBI’s MPC policy statement) and 18^th December (FOMC policy statement), these events are not expected to make any material change in the market sentiments.

·         In the absence of any foreseeable major event, the markets are in maintenance mode for the past couple of weeks.

·         Benchmark indices are consolidating in a narrow range, just keeping the day traders busy.

·         Broader markets are carrying out the process of clearance: the stocks that crossed the red line and strayed into bubble territory are being punished and dragged back to their right place.

·         The stocks that have been underperforming (or are likely to underperform) due to macro conditions, are being assigned lower weights and stocks performing (or likely to perform) strong are being promoted to top order.

·         Traders and investors who became greedy and traded beyond their financial capacity, are being taught some important lessons. They are learning how to balance the sentiments of greed and fear, manage risk and reign return expectations.

The current state of affairs of the Indian markets could be summarized as follows:

Nifty YTD2024: Decent performance, but lags alternatives

Indian stocks have delivered a decent performance YTD2024. The benchmark Nifty50 has gained over 11%; whereas Nifty500 (16.4%), Nifty Smallcap100 (21.1%) and Nifty Midcap100 (21.2%) have delivered much better returns. Media (-6%), FMCG (0.7%), Private Banks (+1.7%) are the sectors that have underperformed the benchmark indices. Pharma (33.6%), Auto (+26.5%), Realty (+25%) are some of the notable outperformers.

However, if we compare the YTD2024 returns yielded by Gilt funds (~10%) or Gold Funds (~20%), Nifty50 returns appear disappointing.

Globally, Nifty50 has been one of the best performing emerging market indices, though it lagged the major markets like the US (S&P 500 +26%), Japan (Nikkei +18%), China (+16%). Nifty50 outperformed Europe (STOXX600 7%), Indonesia (0.5%) Brazil (-3%), and South Korea (-5%), etc.

Foreign investors trim equity stakes to the lowest since GFC

Net YTD2024 FPI inflows in the Indian markets is over Rs one trillion. However, they have been net sellers in equities to the tune of Rs190.6bn.

What has bothered most of the market participants is the net selling in secondary equity markets to the tune of Rs 1.06 trn. Out of this Rs876bn worth of sale occurred in the month of October alone.

With this selling, FPIs have reduced their stake in Indian equities below 17%, from a high of over 20% in pre Covid period. The current stake of FPIs in the Indian equities is the lowest since the global financial crisis (2008-09).

 

Market breadth worsening

Despite the sharp outperformance of the broader market indices, overall market breadth has been dismal YTD2024. In particular, the breadth has been worsening consistently since June 2024.

 

Volumes shrinking

The level of activity in the Indian stock markets has declined in the recent months. The traded value and the quantity of shares traded have declined much below average. This may imply the participation of non-institutional investors/traders in the cash equity market has declined.

 

Market cap at 136% of GDP

The market capitalization of India crossed the US$5 trn mark in 2024. Presently, India market capitalization contributes ~4.25% of the global market capitalization, the highest ever level. For context, in the past two decades, on an average India’s share in the global market capitalization has been close to 2.5%. At the present level, India’s market capitalization is over 135% of the FY2025e GDP, against a 10 year average of 85%.

1HFY25 Earnings growth for Nifty50 companies has been one of the worst in several quarters. As per some brokerages, about two third of sectors are trading at a premium to their historical valuations.

Orderly weakening of USDINR, bonds stable

USDINR weakened 1.5% YDT2024 to its lowest ever level of Rs84.4/USD. The decline has been orderly and well managed. The INR resilience has been remarkable considering that the RBI has been accumulating USD and also buying Gold; CAD has started to worsen, inflation has been sticky and fiscal deficit has remained elevated.

The benchmark bond yields have also eased 6-7% YTD2024, in tandem with the global trends. The bond markets have been very stable and have not shown any sign of jitteriness during general elections, escalation in the Middle East Asia, and recent sharp rise in the US benchmark yields.

Overall, the markets appear stable with no sign of panic or turbulence. The ongoing corrective phase might last for a few more months and add to the inherent strength of the Indian markets, as the excesses of the past get erased and valuations normalize. 

 For me, Diwali this year was certainly not as it ought to be. Untimely demise of many close friends and relatives in the past few months; incessant horrific news flow from the active war zones; conspicuous signs of extreme socio-economic stress in a majority of the population; and apathy of the administration towards common man’s plight and worsening law & order situation dampened my spirit of festival.

I spent the week wandering the streets, slums and villages of Delhi NCR region and adjoining districts. What I witnessed and experienced, makes me believe that blaming selling by the foreign investors for the extant pain in the stock markets is like treating “the effect” as “the cause” – which is not only inappropriate but borders foolishness.

Household inflation, unemployment (including underemployment, disguised unemployment and most importantly unemployability), lack of basic civic infrastructure (drinking water, sanitation, primary health, decent primary education, etc.), are serious challenges for even the citizens living in the national capital or in its vicinity.

It is clearly evident that household savings and consumption may continue to face strong headwinds in the short term (4-6 quarters) at least. It shall reflect on the asset quality of the lenders, fiscal balance (rising reliance on the fiscal support for food, healthcare, education, and constricted ability for revenue mobilization) and eventually slow down the capex growth. 2QFY25 results declared so far are indicative of some of these trends.

I also find the stress in household finance management manifesting in the elevated anger and anxiety in the personal behavior of citizens. A sharp rise in the instances of domestic violence; social aggression; racial & religious intolerance; addiction to drugs, alcohol, & pornography; and insolent disregard for compliance, are some of the conspicuous effects, especially in the lower strata of the population. Rise in corruption and ostentatious consumption (as an act of denial of the actual state or to deceive others) are only a couple of economic consequences.

I also gathered some pearls of wisdom during the Diwali week, which I would like to share with the readers.

End of home cooking approaching?

A reputable entrepreneur shared his thoughts on the likely future trend in the food industry. In a tweet on Diwali day, he wrote, “In my view in 2040: For every 1L population at least one “Food Factory” will operate. From it, for 5 KM radius food will be delivered at home in 10 mins by a drone or a driverless EV. 50% of the population will not use the kitchen even once a week. 80% of hotels will not exist.” Many comments to this tweet mentioned that 16 years is too long a period. This trend may emerge in the next 5-7 years. The necessity of two incomes to run a kitchen may be one of the major factors in forcing the ‘homemaker’ out of home for work.

It is pertinent to note that as per the latest Annual Survey of Industries (ASI) Factories producing food products, 16% of the total number of factories, are now the largest category of industrial units in the country. These factories employ 21,16,000 or 11.4% of the total industrial workers, more than any other industry. The traditional largest employer, textile industry, comes a distant second employing 17,23,000 workers. (see here)

It would be interesting to see what changes the kitchen appliances industry would face due to this emerging trend.

Gulab Jamun is real villain not Soan Papdi

In the past decade or so, the Soan Papdi memes have become an essential part of the Diwali festivities. Once a cherished delicacy, a traditional sweet Soan Papdi has become a joke for everyone, as the modern health-conscious find this particularly sweet very unhealthy and prefer to pass it to others instead of consuming it themselves.

A sweet-maker (Halwai) in Hathras town in Uttar Pradesh educated me on this. As per him, if properly made, Soan Papdi is actually not unhealthy. It is made of besan (gram flour) which is protein rich and not deep fried. On the other hand, the worst sweet is Gulab Jamun – Maida (refined flour), deep fried (mostly in extremely unhealthy reused palm oil), and soaked in sugar syrup for days. It has no nutritional value and tons of ill effects. So, the next time you gulp a savory Gulab Jamun, please be mindful.

Kiwis whitewash the men in blue

The Indian men’s cricket team lost their first test series in India after 2012, after 18 consecutive series victories. The New Zealand team defeated India 3-0 in a three-test series. The worst part is that all three tests were lost very badly. For example, on the third day of the third test, India needed just 146 runs to win the test. On home ground, for a team that bats right till number nine, it should not have been very hard. If only the coach had told all the eight batsmen that “they need to score 19 runs each, and they have 25 overs each to achieve this task. There is no rush and no need to hit boundaries.”

I think all the young investors, who have started their investment journey in the past four years, could draw an important lesson from this. They need not chase the stocks that hit daily limits frequently. They just need to find 10 companies that are most likely to grow their earnings @15% CAGR for the next five years. Investing in these companies may double their capital in the next five years. It is as simple as that.

Internecine celebrations

The residents of the national capital blew up billions in burning firecrackers on Diwali night, despite the dangerous level of air quality, sick children and old parents in their homes, a government order prohibiting non-green crackers, and stretched finances. They offered the most ridiculous of the arguments to justify this act of assured mutual destruction.

In all their sincerity, they believed that by doing so they are (a) protecting their religion; (b) telling other religious communities their true place in the society, and (c) rebelling against the government’s minority appeasement policies.

Little did they realize that (i) they have burned their hard-earned money; (ii) added more poison to the already poisonous air; (iii) poisonous air does not discriminate between Hindu and Muslim lungs & brains, and it would kill both equally; and (iv) the people who claim to be more fierce religious warriors come mostly from lower middle and poor classes, spend most money on firecrackers are the worst affected by the poor air quality. Their children and old parents will suffer the most and they would spend the most on their healthcare.

The administration and law enforcement agencies bother little about their welfare. Like the colonial British government, they are happy seeing the society divided and killing each other. The educated and rich are getting disenchanted from festival celebrations, slowly dissipating the Indian culture and traditions. This is what the colonial rulers always strived for – destroy their culture and traditions, and the people will love to be slaves.

The current market condition reminds me of one of my favorite bedtime stories. I love to narrate this time and again.

Once upon a time a sparrow couple made their nest in a wheat farm. In a few days, the lady sparrow laid four eggs. In two weeks, eggs were fully hatched and four chicks were born. In the meantime, the wheat stems had started growing tall. In another two weeks, the chicks started to fledge and the wheat kernels began to turn golden. This was the day when parent sparrows first discussed leaving their nest and moving somewhere else.

“The crop will soon be ready for the harvest. Our nest shall be exposed and trampled by the harvesters”, the lady sparrow feared. Her companion however was not worried as yet. “Nothing to worry as yet”, he assured her.

In another three weeks, the farm turned completely golden with wheat completely ripe to harvest. The lady sparrow was terribly worried now. “We must fly out now. The chicks have also grown up now and can easily fly to the woods behind the hill”, she argued with her companion. “Nothing to worry about yet. We have plenty of food here. Let chicks eat good and become strong”, the companion remained nonchalant.

In a couple of days, the farmer came to the farm with his wife. He looked at the ripe crop with pride and said, “we shall now call my brothers and begin harvesting the crop from tomorrow”. They soon left the farm. The lady sparrow was terribly frightened now. "Must fly out right now”, she coaxed his companion and chicks. “Nothing to worry for now”, the companion quipped, playing with the chicks.

After a couple of days, the farmer again came to the farm with his wife. “My brothers are all thankless and selfish”, he said annoyingly. I would help them whenever they need, but they have refused to help me in harvesting. I shall now call all my neighbors and begin harvesting from tomorrow. “I beg you please let’s fly out now”, the lady sparrow pleaded with the family. The children had become strong and comfortable in the farm by now. “Not yet”. The companion reiterated. The children agreed.

One more week passed, nothing happened. One day the farmer and his wife again came to the farm. He saw that the wheat kernels were beginning to wither now. The golden crop had developed many black spots. “We live in a world full of selfish and thankless people. We cannot count on anyone for help”, he said furiously to his wife. “Let’s buy our own tools and begin harvesting ourselves from tomorrow”, the farmer said resolutely. “Hey guys let’s get ready, it’s time to fly out”, the sparrow told his companion and children, with a sense of urgency. “What happened now” the lady asked. “Farmer have realized that no one helps those who do not help themselves”. He will definitely come tomorrow and begin harvesting, the companion explained.

In the past three years there have been many instances that made investors nervous about markets. The Russian invasion of Ukraine; ruling BJP reduced to a minority in the Lok Sabha elections, escalation of hostilities between forces of Israel and Palestine, Lebanon, Syria, Iran etc. All these instances raised the specter of a deeper market correction, provoking investors to lighten their equity exposure. The market however continued to belie their apprehensions, and continued to climb higher, simply because earnings were supporting. Now, for the first time in the past 3 years, earnings are showing fatigue and are expected to grow in single digit in FY25, with decline in margins. This is the time investors need to review their equity exposure and take corrective action.

As per the current estimates, FY25E NIFTY50 EPS is expected to grow ~8% (vs over 18% each for FY23 and FY24). FY26E estimates are presently hovering around ~15% growth but may see further downgrades.

In my view, earnings growth with margin improvement is the only sustainable factor for rise in stock prices. Rest all factors may add to the momentum, which if not supported by earnings growth, inevitably fizzles out in due course.

The latest earnings season (1QFY25) is almost over. the ~4% yoy growth in NSE500 profit after tax (PAT) has marginally exceeded the modest expectations of a 3% yoy growth. NSE500 revenue grew ~6% yoy. This is the slowest pace of growth since the covid affected 1QFY21. The refiners and oil marketing companies materially dragged the overall performance. Sequentially, the earnings growth slipped sharply from 4QFY24.

Negative surprises outweigh, smallcap earnings failed the optimism

As per the brokerage Emkay’s report, “the ratio of negative surprises jumped sharply, from 46% to 62% for Emkay coverage and 56% to 66% for the Nifty.” The brokerage however added that “The aggregate numbers were skewed owing to the Energy sector’s 30% YoY PAT drop on a high base. EBITDA margins fell by 20bps YoY to 15.1%, mostly due to a 388bp contraction for the Energy sector – most other sectors delivered strong margins.”

Post the earnings, the consensus Nifty50 EPS witnessed a cut of 1.7% FY25 and 1% for FY26. This is the first earnings cut (though marginal) in almost a year. The Emkay report however emphasized that “The earnings revision trend for small-cap stocks was particularly weak, with zero upgrades of >5%.

 

Lowest PAT, EBIDTA growth in four years

A report by the brokerage house Motilal Oswal’s (MOFSL) highlighted that “Nifty reported the first quarter of a single digit EBITDA growth (5%) in four years, (last time Nifty posted single digit EBITDA growth in Sep’20). Also, 4% PAT growth is the lowest since the Pandemic quarter (June’20).”

MOFSL report further emphasized that “For the MOFSL Universe, the earnings upgrade-to-downgrade ratio has turned weaker for FY25E as 46 companies’ earnings have been upgraded by >3%, while 107 companies’ earnings have been downgraded by >3%. The earnings upgrade/downgrade ratio of 0.4x was the worst since 1QFY21. EBITDA margin of the MOFSL Universe (ex-Financials) contracted 120bp YoY to 16.3%.

 

Fading tailwinds

As per nuvama’s report, “In Q1FY25, BSE500 (ex-OMC) top line and PAT each grew 8–10% unlike FY24, when PAT growth (21%) far outpaced top-line growth (8%). This is owing to fading tailwinds from lower input prices and BFSI credit costs while demand remained weak.”

“Q1FY25 top line remained soft at 8%—sub-10% for a fifth straight quarter. The weakness was led by cyclicals (industrials, and autos)—the leaders of FY24—while consumption, exporters and commodities stabilized at low levels.”

NII weakness percolates down to banks’ bottom line

As per a report by ICICI Securities, credit growth was softer than usual Q1 seasonality due to additional headwinds from muted deposits growth, elevated LDR and deceleration in unsecured personal loans and NBFC segments.

“NII weakness percolated down to the bottom-line with PAT growth of ~8% YoY. On a QoQ-basis, private banks saw NII growth of ~2.5% QoQ while operating earnings were flat and PAT declined 5% QoQ.”

·         Credit growth moderated to ~1.5% QoQ in Q1FY25.

·         Deposits growth slowed down to <1% QoQ). Deposit growth for private banks was healthy at ~17% YoY, but drag from PSU banks (up <10% YoY) slowed systemic deposits growth to ~13% YoY in Q1FY25.

·         CASA growth remains challenging (in single digit YoY) while term deposits continued to do the heavy lifting.

·         Rise in cost of deposits was calibrated, though rate hikes by SBI/HDFCB in Q1 and persistently soft deposits growth suggest risk on the upside.

·         NIM decline was contained partly due to a strong rise in yields on investment. Moderating loan growth and pressure on NIM resulted in slower NII growth. Adj. NII growth for private banks moderated to ~14% YoY (vs. ~16% YoY loan growth).

Management commentary positive

As per the Antique Stock Broking, Overall management commentary has been positive, key takeaways are: a) IT companies believe that lower inflation and interest rate could lead to improvement in the US macro environment; b) Consumer companies are seeing signs of rural recovery which may further accentuate with the above normal monsoon; c) Domestic private capex is seeing traction, particularly in the real estate; (d) Banks have tightened credit filters for unsecured lending. HDFC Bank highlighted that it will grow slower on advances as against deposits in order to bring down loan to deposit ratio.”

Investors should cut the noise and stay focused on earnings

In my view, 2QFY25 and 3QFY25 are critical for investors, especially for household (retail) investors who are predominately invested in smallcap, midcap and narrative (defense, railway, clean energy, China+1, etc.) stocks. If the earnings momentum fails to match their optimism; or headwinds develop in terms of slower global growth momentum and negative flows; these stocks could face sharper correction in 2025.

It is therefore desirable for them to stay focused on earnings and growth momentum rather than bothering about big picture things like geopolitics, the US fed monetary policy; yen carry trade etc.

One of the basic principles of economics is that no one makes abnormal gains (or loss) from an economic activity over a longer period. The forces of demand and supply tend to attain a state of equilibrium as higher margins attract more supplies and lower margins push the marginal suppliers out of the market. In the short term, however, suppliers can make super profits taking advantage of the demand-supply inequilibrium. Most economic activities thus follow a cyclical path rather than a linear path.

This principle does not apply to the states where markets are not free and monopolies with state protection and patronage are allowed to thrive at the expense of consumers.

We have also witnessed that businesses that own niche intellectual property rights (IPRs) or ownership of scarce natural resources have defied this principle for a much longer period of time, as compared to the usual businesses.

Applying this principle to the current market scenario, I find that the investors may be ignoring this elementary principle in their growth and profitability assumptions for the basic engineering businesses like Solar & Wind equipment & EPC, Railway equipment & EPC, Defense electronic & war equipment, and low margin electronic manufacturing, etc. Most global solar panel manufacturers are already struggling with oversupply issues.

Most analysts are projecting a linear growth for these businesses over the next several years. They are valuing these businesses on the basis of multiples of order book and sales.

I have not read any research report that says, “the fabled electronic manufacturing services (EMS) business is akin to garment export business. Its low margin assembly business which would require consistent capex and government support. These businesses will face stress every 3 to 5 years when their contracts come up for renewal. All of them carry the risk of the OEM going out of business which might take them along into a deep pit.”

 

Recently, ISRO chairman S Somanath “highlighted the challenges faced by the satellite launch market, stating that rockets are available but there is a lack of demand. The market is depressed, and even companies like Arianespace struggle with profitability without government subsidies. The main issue is that there are a limited number of players in the satellite market, leading to fierce competition. To address this, there is a need to create internal demand and a robust ecosystem, as waiting for foreign satellites is not a sustainable approach”. (Economic Times, 17 June 2024)

There is a rush to buy the defense tech indigenization and export theme. Demand for the stocks of potential drone manufacturers far exceeds the supply, resulting in an exponential rise in stock prices. Investors are not recognizing that in countries like the US and China, high school students are learning how to design and manufacture drones. Artificial intelligence (AI) may make conventional weapons redundant in no time. The future wars may be fought in cyber space rather than the battlefields with guns and missiles. The ongoing Russia-Ukraine war is a classic example of the complete failure of conventional weapons and war strategies.

The following meme regarding popularity of Electric Vehicles most aptly sums up the fallacy of these popular investment themes. (Sourced from social media, copyrights fully acknowledged)

Investors accepting the promise of 100% EV vehicles in two decades must assess the scenario where the copper price exceeds the gold price!!!

The ongoing celebrations of the Festival of Democracy shall end on 4^th June 2024, with the announcement of election results for the 18^th Lok Sabha. In the past two months, the market narrative in India has pivoted around the election outcome. Even though 4QFY24 earnings did impact the performance of specific stocks materially; speculation about the election results has mostly dominated the sentiments.

Once the elections are over and the contours of the new government are clear in the first fortnight of June, the focus will shift to the presentation of a full budget for the current financial year. To keep the tradition, only an interim budget (vote on account) for FY25 was presented in February 2024 to run the government till a new government is formed for the next five years. A final budget is expected to be presented by the new government in the last week of July 2024.

Some media commentators and market experts have attempted to sketch the final budget based on the election speeches and media reporting of the party’s manifestos. Fears have been expressed that in the event of a non-BJP government assuming power at the center, the pace and direction of economic growth and development may slow down as resources are diverted to fulfill the populist agenda of opposition parties. In a non-BJP regime, the budget allocation for capital expenditure and infrastructure development may diminish materially.

I find that this narrative suffers excessively from an intrinsic fear of change. I could not find anything in the manifestos of opposition parties, mainly Congress, that would suggest any change in the focus on infrastructure development and faster economic growth. Most social welfare schemes promised in the manifesto aim to reduce poverty and achieve equitable growth. Almost all these schemes are in vogue in many states and at the central level. A set of similar schemes is also promised in the BJP manifesto also.

Technically speaking, market participants should rejoice the Congress manifesto, as it promises a much larger amount of cash in the hands of consumers. This could help put the missing piece of Indian growth, viz., consumption, in place. Provisions like statutory guarantee for MSP can also boost the farm input sector. Consumers and Chemicals are two major underperforming sectors of the market.

Besides, if a non-BJP government assumes power at the center, the market participants may again begin to speculate about tax exemption for the LTCG and dividends, etc. On the other hand, several BJP leaders and think tank members have spoken about the need for estate duty (inheritance tax) in the recent past. This has been a fear factor in pre-budget analysis since 2017. The finance ministers have defended LTCG taxation and dividend tax. In the past 10 years, effective personal taxation rates have remained high and the proposed Direct Tax Code is expected to remove more exemptions.

Insofar as fiscal profligacy is concerned, there is no evidence that the UPA government (2004-2014) indulged in fiscal indiscipline during their regime. Center’s fiscal deficit did jump from 2.54% in FY06 to 6.46% in FY09 due to the stimulus necessitated by the global financial crisis. However, it was gradually brought down to below 4% by FY15. This was despite welfare schemes like MNREGA, fuel subsidies, etc. Similarly, during the NDA regime, the center’s fiscal deficit jumped to 9.17% in FY20 and has been on the mend since then. This is despite the implementation of Food Security, cash payout to farmers, and many other welfare schemes.

There is no empirical evidence to support the fears of fiscal indiscipline by a non-BJP government.

I find that most schemes and programs promised by NDA and opposition INDIA groups would be implemented, if at all, gradually and mostly by merging and optimizing existing schemes at the state and center levels. The fiscal burden will come only incrementally with the equivalent or higher rise in nominal GDP. The fear of likely fiscal slippages may therefore be unfounded.

Logically, the analysts should be looking forward to a stock market rally in the short term if a non-BJP government is formed at the center. Though, it may not actually happen. We may see a knee-jerk reaction down and then a recovery, after the full budget is presented in July.

In case of a BJP victory, we may see a euphoric move up and then a corrective move down as the budget may not enthuse the market participants and earnings fail to justify some lofty valuations.

In either case, after July 2024, the markets shall be guided by the earnings, macro conditions, and global developments, rather than the outcome of elections.

So to answer What if? – I would say Nothing, just chill.

Also read

What if? - Part 1

What if? - Part 2

What if? - Part 3

 The benchmark Nifty50 has oscillated in a tight range in the past eight weeks. On a point-to-point basis, it’s hardly changed - remaining mostly in the 19500-19700 range. More importantly, it has weathered a barrage of bad news in this period and stayed calm as reflected in the low volatility index.