Do it yourself

In this context, I would like to draw readers’ attention towards two particular reports that I find representative of the analysis advising caution.

“Dotcom on Steroids” by GQG Partners.

First report, titled “Dotcom on Steroids” has been published by GQG Partners, USA. This report draws parallels between the current AI-driven tech boom and the dotcom bubble of the late 1990s, warning of similar risks ahead. The report postulates-

“Today's market, particularly in the tech sector, exhibits dotcom-era overvaluation, with lofty multiples, slower earnings growth, and a weaker macroeconomic backdrop, in our view

We believe today's technology sector no longer represents forward-looking quality due to decelerating revenue growth, collapsing free cash flow, and increasing competition.”

The S&P 500 today trades at 23x TMF EPS—nearly the same as in 2000, but with slower growth (10% vs. ~18% without any stimulus then). Most tech stocks already trade at 1999-like multiples, unlike 1999’s budget surplus, the U.S. now faces fiscal deficits, weakening the backdrop.

The key points analyzed in these reports are as follows:

Rising Capital Intensity

Big Tech’s capex now consumes 50–70% of EBITDA (similar to past telecom and energy bubbles). This undermines the old thesis of tech as “hyper-scalable” with minimal investment.

·         Microsoft in 1999: traded at 60x earnings with 35% revenue growth, but took 15 years to recover from the crash.

·         Cisco: once the largest company during the internet bubble, driven by over-optimistic growth projections—similar to Nvidia today.

·         Today’s valuations (Nvidia, Palantir, ServiceNow) resemble bubble-era extremes.

Penetration driven growth hitting peak

“Most of today's Al capital expenditures are funded by advertising revenue. Digital advertising now accounts for more than 70% of all advertising, so the penetration-driven growth story could be approaching its peak. Morgan Stanley expects the US digital ad industry to grow at a 9% compound annual growth rate (CAGR) from 2025 to 2030-less than half of its 20% CAGR between 2014 to 2019.”

·         Heavy dependence on AI-related capex funded by cyclical advertisement revenues makes growth fragile.

·         Analysts fear AI giants may be this generation’s “Nifty Fifty”—dominant but overpriced.

Competition landscape changing

During the 2010s, big tech was dominated by monopolies, e.g., Amazon dominated e-commerce, and Google dominated search. This not valid today. All big companies directly compete against each other in the same space. Cloud market is a good example of the deteriorating competitive landscape. This was once a stable three-player market: Microsoft, Amazon, and Alphabet. However, a disruptive fourth player (Oracle) just entered in a big way and is explicitly undercutting peers on pricing by 40%. Adding to the shakeup, CoreWeave-a financially constrained fifth player with an arguably more cutting-edge product-has announced its intention to aggressively gain market share through pricing pressure.

Big tech is now incumbent not disrupter

In the 2010s, big tech were the disruptors. Today, big tech is the incumbent, while Al is emerging as a highly disruptive force. AI winners would be known only a decade or more later, just like the internet era winner (Meta, Google) was declared several years after the bubble burst.

Conclusion: Tech is no longer uniquely superior in growth; risks of poor investment outcomes are high if bought at inflated prices.

Voltage too high, be cautious, Ambit Capital

Second report titled, “Voltage too high, be cautious”, by Ambit Capital, India, cautions that near term growth in the electrification of India theme are more than priced in, but the mid-term risks like risks (slowing demand, BESS substitution, subsidy phase-outs, rising global competition) are not yet considered. It argues that better opportunities may exist outside the tech sector with lower risk and similar returns.

·         Post-Covid electrification boom (driven by transmission & distribution demand) created supply-demand gaps and high margins for equipment makers. But these conditions are peaking. Risks are rising beyond FY28 as growth slows, competition intensifies, and margins normalize.

Demand–Supply Outlook

·         HV transmission equipment is currently undersupplied, but heavy capacity expansions (transformers, switchgear) will narrow the gap in 2–3 years.

·         National Electricity Plan (NEP) targets show >30% decline in installations in FY27–32 vs FY22–27.

·         Battery Energy Storage Systems (BESS) will reduce the need for fresh transmission infra post-2028.

·         Private capex remains muted (capacity utilisation ~75%).

·         PGCIL capex plan accelerates till FY28, then flattens.

Execution Risks

·         Land and regulatory delays already caused FY26 targets to be cut.

·         Order growth likely to peak in FY26–27, then plateau.

Policy Risks

·         Gradual removal of ISTS waivers (inter-state transmission subsidies) will raise RE project costs and reduce transmission demand.

·         Shift toward intra-state RE sourcing could hit long-distance transmission growth.

Competitive Landscape

·         Local subsidiaries of MNCs like ABB, Siemens, Siemens Energy gained share recently, but global majors (Schneider, WEG, Nidec, Eaton, Delta) are scaling up aggressively. Schneider, in particular, is expanding 2.5–3x capacity in India.

·         Export contribution shrinking for most domestic players.

Margins & Returns

·         Margins peaked in FY24; price growth moderating.

·         RoCE expected to decline.

·         Multiples corrected from Sept/Oct 2024 but still downside risks persist.

These two are only representative reports. I find several such cautionary reports on the rising (and unsustainable) high valuations, slowing growth, rising household (retail) exposure to these high valuation stocks and sectors, elevated macro concerns and explosive geopolitical conditions.

As has been the case on every previous occasion, most market participants appear to be believing that they still have some distance to cover before this bubble burst, and they will be able to “exit’ well in time – regardless of the fact that it has never happened in the past.

In my view, the US market bubble is within striking distance of the needle. Obviously, every market in the world will feel the tremor, whenever the US tech bubble bursts. India may be no exception. However, India is much better placed this time compared to 2000, because the Indian markets have been underperforming the global markets for the past one year, FII holdings is now at lowest level since the global financial crisis, speculative activities have reduced materially due to consistent regulatory intervention, Indian markets have insignificant exposure to high-tech sectors like AI, Cloud, semi-conductors etc., and a large part of Indian markets is still reasonably valued (though not cheap).

More on strategy for the Indian markets, next week.

Also read

Dark clouds gathering on the horizon – 1

Dark clouds gathering on the horizon - 2

Noting the economic conditions, especially still elevated inflationary expectations and resilient growth, the Fed indicated that 2025 may see fewer cuts than the previously estimated number. “With today’s action, we have lowered our policy rate by a full percentage point from its peak, and our policy stance is now significantly less restrictive,” Chair Jerome Powell said at his post-meeting news conference. “We can therefore be more cautious as we consider further adjustments to our policy rate.”

The FOMC raised its projection for full-year 2024 GDP growth to 2.5%, from 2% in September. However, in the following years, the FOMC officials expect GDP to slow down to its long-term projection of 1.8%. The committee lowered its expected unemployment rate in 2024 to 4.2%, while headline and core inflation were pushed higher to 2.4% and 2.8% respectively, slightly higher than the September estimate and above the Fed’s 2% goal.

The resilient growth and elevated inflationary expectations would require the Fed to hike or hold rates in 2025. However, officials appear wary of keeping rates too high and risking an unnecessary slowdown in the economy.

Insofar as the Trump 2.0 policies and their impact on the growth are concerned, the Fed Chairman Jerome Powell prefers a wait and watch approach. IN the post FOMC meet press interaction he said, “We’re just not at that stage.” He further added, “We need to take our time, not rush and make a very careful assessment, but only when we’ve actually seen what the policies are and how they’ve been implemented.”

The financial markets reacted negatively to the FOMC decision. Dow Jones lost 1123 (2.58%). Falling for the tenth consecutive day, it has recorded its worst losing streak since an 11-day slide in 1974. The S&P500 (-2.95%) and Nasdaq Composite (-3.56%) fell even more. The benchmark 10-year treasury yields jumped 3.08% to 4.52%, the highest level since April 2024 and 90bps higher than their August 2024 lows. UST Index rose 1.2% to its highest level in almost three years. Gold prices fell 2.3%, taking the yellow metal below US$2600 level after 3 months.

I find many events, besides rate cuts and elections, that are occurring on the sidelines that need to be noted by the investors. Considered individually, these events may not look like triggering a meaningful move in global markets. However, if we take a collective cognizance of these events, the probability of global market shock would certainly rise by a few points.

The following events, for example, have drawn my attention in the recent months.

Central banks loading on gold

Post the global financial crisis 2008-2009, the central banks have significantly increased their gold accumulation. In 2023, central banks added 1,037 tonnes of gold – the second highest annual purchase in history – following a record high of 1,082 tonnes in 2022. The trend is continuing in 2024 also. (see here)

The notable thing in this trend is the sharp rise in gold accumulation by the Russian and Chinese central banks. President Xi and President Putin, along with Iran and North Korea (CRIK) are seen as an informal anti-NATO alliance. (see here)

Biden provides fresh impetus to the Sino-US tariff war

The Biden administration has provided significant impetus to the Sino-US tariff war started by the Trump administration. Despite strong objections from the domestic industry, the US has not only retained the tariffs imposed on the Chinese imports by the Trump administration in 2018, but made some material additions to the list. The new tariff list includes a 100% duty on Chinese EVs, 50% on solar cells and 25% on steel, aluminum, EV batteries and key minerals.

Besides, the Biden administration announced new measures aimed at Chinese e-commerce platforms to minimize the low-value imports eligible for duty and tax exemptions. (See here)

Putin mediating thaw between India and China

The rhetorical aggression between China and India has decelerated materially in the recent weeks. It is reported that China is retracing from its advanced positions in the Indian territories and willing to disengage completely. Apparently, it has occurred after the recent visit of PM Modi to Russia and Ukraine. (see here) This is obviously an important geopolitical development after the coup in Bangladesh, allegedly with support of the US. (see here)

Hedge Fund piling on short positions

In the past few weeks hedge funds have been piling on their short positions. They have now been net sellers for the five consecutive weeks, not a normal situation when the benchmark indices are making all-time highs.

Chinese economy imploding, govt puts a tight leash on investment professionals

All the recent data about the Chinese economy indicates that the Chinese economy is slowing much faster than previously estimated. As per the current estimates, China is most likely to miss even a modest 5% growth target. (see here) By all indications the Japanification of the Chinese economy is happening against the wishes of all. The Chinese economy has been the engine pulling the global economy in the past two decades. If this engine falters, it cannot be good news for the global economy and therefore markets.

The Chinese authorities have been taking action against the entrepreneurs, like Jack Ma of Alibaba, failing to adhere to the strict regulatory norms. Recently, the authorities cracked down on financiers – impounding passports of 8700 investment bankers and restricting their overseas travel. (see here)

This could be seen by some as a precursor to a massive shift in the economic development followed in the past two decades. (see here)

Traders incurring losses despite market rally

On 12^th September 2024 (weekly F&O expiry day), many option traders in India experienced exceptional losses due to sharp surge in the benchmark indices in the last hour of trading. It happened again last Friday. This has happened when sharp underperformance of the broader markets and popular stocks is already bothering the non-institutional (retail) investors. In the technical analysis parlance, these are conspicuous signs of a large-scale distribution taking place. Empirical evidence suggests that this phase of the market is usually followed by a dull period in the market, marked by poor returns.

It's still the month of September and on my morning walks, I can feel the chill in the air. This is not usual weather in Delhi NCR. I am getting the same sense in markets. If you are also feeling this chilling sensation, please do share your views.

No panic in the boardroom

Unlike the previous two rate cycles that started with a rather aggressive 50bps rate cut – first October 2008 post the Lehman collapse and second March 2020 post Covid-19 break out – this cut is apparently not a panic cut.

The Fed chairman sounded confident about growth and employment level. He emphasized that the central bank is not in a hurry to ease policy, as he sees no likelihood of an elevated downturn in the economy. He mentioned, “There’s nothing in the SEP (Summary of Economic Projections) that suggests the committee is in a rush to get this done.”

The Chairman categorically advised the markets to not take this 50bps cut as “new pace”. He said, “we’re going to go carefully meeting by meeting, and make our decisions as we go”.

The decision to cut was however not unanimous. In a rare dissent, one member (Michelle Bowman) voted for a 25bps. This could be seen as yet another sign of “no panic” in the Fed board room.

Committed to price stability without pain in labor market

Announcing a victory over inflation, Mr. Powell announced, “The U.S. economy is in good shape. It is growing at a solid pace. Inflation is coming down.”

As per the latest economic data release, the US GDP expanded at 3% annual rate in 2Q2024 with 4.2% unemployment rate (considered near full employment), and inflation at 2.2% in August 2024.

Outlining the latest policy objectives, he commented, “We’re trying to achieve a situation where we restore price stability without the kind of painful increase in unemployment that has come sometimes with disinflation”. Guiding the markets, he emphasized that investors should take the Fed’s 50bps rate cut as a sign of its “strong commitment” toward achieving that goal.

Neutral rate seen close to 3%

The FOMC members see cuts of 25bps each in November and December FOMC meetings; 100bps cut in 2025 and 25bps cut in 2026 – implying that the latest easing cycle may end with the Fed rate range of 2.75-3.00%.

The Fed Chairman also mentioned in the post FOMC press meet that the neutral rate is likely significantly higher than it was on the previous occasions.

Markets ended lower

Markets – equity, bonds and commodities – ended the day with marginal cuts post the Fed announcement; while the USD was marginally stronger. This could be an outcome of either (i) sell on news; or (ii) traders’ disbelief in what Fed says about the strength of the economy.

What now

In my view, this aggressive 50bps cut is more of a correction than an aberration. Perhaps the Fed realized that they are running slightly behind the curve and hence tried to catch up. I do not see it as a panic move and would not like to indulge in “there is more to it than what meets the eye” debate.

Unlike 2008, there is no corporate balance sheet crisis, no risk of global markets freezing, and unlike 2020 there is no shutdown necessitating fiscal and monetary profligacy. It is a normal rate cycle change in response to a normalizing economic cycle. Therefore, expecting a market reaction like 2008 (sharply down) or 2020 (sharply higher) may not be appropriate.

I feel the US markets will adjust to the new policy trajectory in a couple of weeks and move accordingly. The lower rates shall help arrest the decline in the US housing markets and consumer spending. The bond yields may come down and the hedge trade in gold may begin to unwind. The corporate discretionary spend may also normalize as the cost of borrowing eases. This could be a relief for the Indian IT services companies.

For India, I am not sure if the RBI will rush to cut in October meeting, but would not rule it out completely. Financials and commodities are two sectors that need to be watched closely, in my view.

In the next couple of months, the markets in India will be driven by the 2QFY25 earnings. Any disappointment could lead to a decent correction in the markets. For now, I do not see a need to make any change in my investment strategy. (More on this next week)

The major risk to the markets comes from geopolitics now. The situation in the Middle East is worsening by the hour. NATO and CRIK (China, Russia, Iran and North Korea) alliances are hardening their positions, both on trade and war, making the situation explosive. (More on this next week)

The Indian indices have not fallen materially from their recent highs. The benchmark Nifty is barely down three odd percent from the highs it recorded last week. Obviously, in India, the household investors are not yet worrying about the possibilities of a bear market, as for them the sky is still bright blue with few scattered cumulus clouds. Nonetheless, this phrase is gaining frequency in the personal discussions.

From my various interactions with the market participants, I gather that many of them may have a different, and often misplaced, understanding of the concept of bear market.

The most widely accepted explanation of a bear market is “a 20% or more decline in the benchmark index for a sustained period of time.” This decline in market indices is usually accompanied by growth pessimism and change in the asset allocation in favor of less risky assets. Capital preservation takes precedence over wealth maximization, as the primary investment objective.

The key elements of a bear market, therefore, are growth pessimism; and wider asset allocation shifts towards less risky assets to preserve capital by sacrificing potential gains from equity. Fall in market indices is the most common consequence of a bear market. 20% fall in indices is just an indicative number based on empirical studies of previous bear markets. It is however not a precondition for a bear market.

Bear markets can, at times, last for many years. Japanese equities witnessed the longest bear market running for more than two decades. Chinese equities are in a bear market for over 15 years for now. Bear market in the US tech stock lasted for almost a decade after the bursting of the dotcom bubble in the year 2000. In India, bear markets have usually not lasted for more than 3 years.

It is important to understand that ‘bear market’ is a fundamental concept. It is not related to technical analysis or trend analysis of the market. For technical analysts the markets are defined on the basis of the current trend in the indices. These trends (uptrend, downtrend, sideways) can change in a couple of days. At times these trends could be incongruent to the fundamental trends, thereby causing irrationalities (extreme buoyancy or pessimism) in the markets. These irrational market conditions should normally be not considered bull or bear markets.

Where do we stand?

In my view, in strict technical terms the current uptrend in Nifty50 that started from October-November 2023 has terminated earlier this week. Nifty may move in a 5 +/- band (23100-25500) for a few weeks before a new trend emerges. At present the probability of a downtrend is higher than the uptrend. In case of a downtrend Nifty50 may yield 80% to 100% of the upmove from 19080 level. In case of extreme pessimism, Nifty50 may even fall to 17800 level for a few days. This downtrend may last anywhere between 9 to 17 months.

Fundamentally, currently there is no evidence of growth pessimism, or asset allocation shift. In fact, the growth estimates are getting revised upwards, earnings buoyancy has slowed down a bit buy still a long distance from material deceleration. Allocation to equities remains strong. I shall be closely watching these trends over the next 6 months for any indication of worsening, to bother about a bear market in Indian equities.