Do it yourself

In a keenly watched two-day meeting, the first after the inauguration of the new US President, the Federal Open Market Committee (FOMC) of the US Federal Reserve (Fed) decided to pause its kept federal fund rates in 4.25%-4.5% range, after cutting it overall by 1% over its three previous meetings. The decision to pause is governed by a strong and resilient labor market and persisting inflation.

In a post meeting press interaction, Fed Chairman Jerome Powell noted that “The unemployment rate has stabilized at a low level in recent months, labor market conditions remain solid, and Inflation remains somewhat elevated.” He further added that the Fed needs to see “real progress on inflation or some weakness in the labor market before we consider making adjustments.”

Most notably, he emphasized that we're meaningfully above the ‘neutral rate’. He said, “I have no illusion that anyone knows precisely how much that is and but having cut 100 basis points means that it's appropriate that we not be in a hurry to make further adjustments.” (‘Neutral rate’ is a fed rate that is considered neither stimulative nor restrictive of growth under the current circumstances.)

Higher for longer: The market participants have taken this to imply that the current rate cut cycle is certainly not over and may resume after a pause, as the Fed gathers more evidence on inflation. Nonetheless, analysts now appear less sanguine about the lower bound of the present rate cut cycle. The consensus amongst them is emerging that the long-term bottom rate may have risen to 3% from the earlier estimates 2.5%. The ‘Fed pause’ is also being influenced by uncertainties surrounding the new administration's direction - on fiscal, trade, and government spending matters. The Fed officials noted “they don't intend to react until policies reach the implementation stage and begin to impact incoming economic data”.

Markets: Post the Fed decision, stock prices ended lower (S&P500 -0.5%), USD marginally stronger (DXY +0.2%) and benchmark bonds stronger (US 10yr Yield -0.37%).

RBI: The ‘Fed pause’ has made the February 06^th rate cut by the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), less certain. There are however more chances that RBI may change its stance to ‘accommodative’ from ‘withdrawal of accommodation’, signaling now growth is a priority over inflation.

One sector that is inflicting extreme pain to the investors in Indian equity is ‘power'. The stock prices of almost all companies present in the power sector value chain have corrected 25-50% from their 2024 high levels. The correction in stock prices has been particularly pronounced after the declaration of ‘energy emergency’ by the president of the United States.

In my view there are three factors responsible for this correction, viz., technical, fundamental and sentimental.

Technical: The stocks of companies in the power sector value chain had seen a sharp runup in the past three years. Reasons for enhanced investor’s interest in the sector was underperformance of a few years showing bottom formation on charts; exciting announcements by the government relating to the sector; state electricity board reforms to reduce transmission & distribution losses; power demand growth picking up; and electric mobility and climate control commitment of several governments etc. The enhanced investor interest however took the stock prices quickly into the bubble territory. The stock prices are now correcting to more reasonable levels.

Remember, stock prices usually follow the laws of physics. A pendulum that swings to the extreme right (bubble), never stops immediately at a neutral position. It usually travels the equal distance to the left (distress); then makes some small moves on either side (greed and fear) before settling to a neutral position.

In my view, technically speaking, we may complete the left swing in the next couple of months, and achieve full mean reversion by the summer of 2025.

Fundamental: Enthused by a technical rally, analysts had started translating political promises into numbers and extrapolating these numbers to perpetuity to arrive at fancy valuations. An extended monsoon and a mild winter have resulted in lower power demand in 3QFY25. Some analysts are using this opportunity to correct their highly optimistic projections. Some are also using the pretext of the latest Chinese AI model (DeepSeek) to moderate their electricity and power equipment demand forecast; arguing that the demand for new data centers may be much less than previously estimated.

In my view, power demand growth in India is a function of rising affordability for fans, lights, refrigerators and air conditioners; rising popularity of EVs; more metro rail projects and new electrified rail routes; urbanization; depleting water tables requiring electricity to fetch water from ground; etc. There could be some seasonal slowdown, but structurally demand is set to rise materially over the next couple of decades.

Explosion in data center demand so far has mostly been a spreadsheet phenomenon. Further, assuming that India and other governments allow China to have access to their data through DeepSeek, is also a little far-fetched to me. DeepSeek is just another development (though very significant) in the global technology transition. It will only accelerate the adoption of AI by governments and businesses and trigger a fresh wave of development in the field of AI, using cheaper resources and methods. The impact on the power sector value chain could only be positive.

Sentimental: An energy emergency declared by President Trump has introduced a fair degree of uncertainty in respect of fiscal support to clean energy. This has made investors fearful of the massive investments made in the development of the clean energy ecosystem being rendered useless.

I am not sure if serious investors and responsible states would agree with the President’s outright rejection of climate concerns; and revert back to fossil fuels.

Moreover, in countries like India, where clean energy is not only a medium for climate control, but also a critical resource for achieving energy security and financial stability. Losing focus on development of a strong renewable energy generation base is not an option for us. For context, out of 34GW total capacity added in the year 2024, about 85% was renewables. Solar project constituted ~72% (24.5GW) of the total new capacity addition; with solar contributing 10%. The present project pipeline indicates about 50GW renewable capacity addition during FY25 and FY26.

 

Power sector value chain (generation, transmission, distribution, and consumption) is indubitably one of the decadal investment themes in India. However, to make money, investors need to follow strict discipline and not be unduly influenced by the forces of greed and fear.

 

Presently, the total market capitalization of the NSE is close to Rs415 trillion, almost the same as it was during the last week of May 2024. The benchmark indices like Nifty 50, Small Cap 100, Nifty 500, Bank Nifty etc. are also trading almost at the same levels as prevailed during the last week of May 2024.

Mr. Donald Trump has chosen to take some time before speaking with his Indian counterpart Mr. Narendra Modi. Trump has chosen to call the Chinese premier Xi Jinping, even before his inauguration. Prime Minister Modi has apparently sent a written congratulatory message to Trump, instead of calling him. This small pause in the top-level communication has triggered a debate about the shape of Indo-US relations in the near future.

In my view, before drawing any conclusion from Trump’s pause, and writing obituaries of the Indo-US strategic partnership, we must study the evolution of Indo-US relationships. This relationship has evolved over the past 75 years. It is primarily based on mutual need and shared democratic values, and goes much beyond the personal equation of individual leaders.

Prologue

The foundation of Indo-US was laid during the 1949 visit of Prime Minister Nehru’s visit to the US and meeting with President Henry Truman. Nehru was welcomed by everyone he met during his multi week stay in the US. However, Not much was achieved in diplomatic and economic terms.

Ten years later, President Eisenhower visited India for five days, in 1959. He addressed the Parliament and expressed “deep satisfaction at the friendly and cordial relations existing between their two countries, and their firm belief that their common ideals and objectives and their quest for peace will ensure the maintenance and development of the strong ties of friendship between the two countries.” Again, the Indo-US relations did not move beyond exchanging pleasantries.

The first chapter

India co-founded the Non-Aligned Movement in 1961, taking a neutral stand in the cold-war between the USSR and the US. 1962 was an important year in the evolution of Indo-US relationship. This year, the U.S. Agency for International Development signed the Kanpur Indo-American Program to help in the establishment of the first IIT. The program included deployment of American faculty members to develop academic programs and research laboratories at the new university over the next decade. Later, President Kennedy supported India in the Indo-China conflict, recognizing McMahon Line and also providing air assistance and arms. Next year, in 1963 Norman Borlaug, a renowned US Agronomist, visited India and laid the foundation of the Green Revolution. India also benefited from wheat imports from the US under PL-480 “food for peace” program during the 1960s.

1965 saw a material deterioration in the US-Indo relationship as Washington sided with Islamabad in the second major Indo-Pak conflict. The situation worsened further in 1970’s when President Nixon sided with Islamabad during the 1971 Indo-Pak war. This was the time when India signed a 20 year “Treaty of Friendship and Cooperation” with the USSR. The relationship deteriorated further in 1974 when India became the first non UNSC permanent member to conduct a nuclear test.

A reproachment effort started in 1978, after Mrs. Gandhi was defeated in the 1977 general elections. President Carter visited India and Prime Minister Desai reciprocated with a 6-day visit to Washington. However, with the US enacting the Nuclear Nonproliferation Act in 1978, the process was derailed.

Prime Minister Gandhi made another attempt to revive Indo-US relations during her visit to Washington in 1982. She and President Regan largely agreed to increase cooperation and resolve a dispute over nuclear power. Vice president Bush (Sr.) led a high level visit to New Delhi to explore areas of cooperation. However, 1984 Bhopal Gas tragedy again derailed the process.

Post the end of the cold war (1989), for a few years, India and the US had a good working relationship. Prime Minister Rao unleashed substantial economic reforms and expanded economic ties with the US. However, things turned for the worse in the summer of 1998, when prime Minister Vajpayee surprised the US intelligence agencies with a nuclear test and announced India as a full-fledged nuclear power. President Clinton recalled his ambassador to India and imposed severe economic sanctions on India.

A year later in 1999, President Clinton called Pakistan Prime Minister Sharif and nudged him to end the Kargil conflict immediately. In the year 2000, Clinton became the first US President to Visit India since 1978. The visit marked the first step toward forming a durable Indo-US strategic relationship. Clinton agreed to not make signing of CTBT a precondition for Indo-US economic cooperation. The Indo-U.S. Science and Technology Forum was established during this trip, which also marked the beginning of the end of the Cold-War strategic US-Pak alliance. President Bush lifted all US sanctions on India in 2001.

Second chapter

In 2005 a new chapter in the Indo-US relations started. Both countries signed the New Framework for the U.S.-India Defense Relationship, which set priorities for defense cooperation in maritime security, humanitarian assistance/disaster relief, and counterterrorism. They also inked the Civil Nuclear Cooperation Initiative, a framework that lifts a three-decade U.S. moratorium on nuclear energy trade with India. Under the agreement, India agrees to separate its civil and military nuclear facilities and place all its civil resources under International Atomic Energy Agency (IAEA) safeguards. In exchange, the United States agrees to work toward full civil nuclear cooperation with India. (The US Congress and Indian Parliament ratified this deal in 2008.) In October 2005, both countries jointly conducted the largest naval exercise to date, followed by major air and land exercises.

In 2006, President Bush visited India and finalized, with Prime Minister Singh, Singh finalized the framework of the civil nuclear deal and boosted security and economic ties. The nuclear deal made India the only country outside of the Nonproliferation Treaty that has nuclear capabilities and is allowed to participate in nuclear commerce.

In 2007, an 18year old ban on import of Indian mangoes to the US was lifted, marking the beginning of an effort to double the Indo-US trade within three years. Bilateral trade in goods and services totaled around $45 billion in 2006 and rose to more than $70 billion in 2010.

In 2008, Chandrayaan-1 became the first Indian spacecraft to land on the moon. It carried two scientific instruments designed by NASA scientists, marking a significant progress in Indo-US space cooperation (an agreement that existed since 1963).

Third chapter

In 2010, India and the US convened the first U.S.-India Strategic Dialogue. Secretary Clinton lauds India as “an indispensable partner” and President Obama claimed the relationship “will be a defining partnership in the twenty-first century.” President Obama visited India in November. He addressed the Parliament and backed the country’s long-held bid for a permanent seat on the United Nations Security Council. He announced $14.9 billion in trade deals.

In 2012, Secretary of Defense Leon Panetta visited India to bolster military ties. Next year (2013), Prime Minister Singh visited Washington to meet President Obama for the third time in four years to discuss important issues such as security, trade, immigration reform, and the civilian nuclear deal.

In 2014, President Obama invited Prime Minister Modi to the White House. President Obama made his second visit to India in 2015 as Chief Guest at Republic Day celebrations. Ten-year U.S.-India Defense Framework Agreement was renewed for another ten years.

In 2016, the US elevated India to a “major defense partner”, a status no other country holds. This enabled India to enjoy some of the benefits of being a U.S. treaty ally, such as access to defense technology.

In 2017, Prime Minister Modi visited the US to meet President Trump, who raised sharp disagreements with India over trade, climate change, and H-1B visas. Regardless, their joint statement emphasizes strengthening their defense partnership, cooperating on counterterrorism efforts, and boosting economic ties.

In 2018, during a “two-plus-two” dialogue in New Delhi an the Communications Compatibility and Security Agreement (COMCASA) was signed allowing India access to advanced communication technology used in U.S. defense equipment and allows real-time information sharing between the two countries’ militaries.

Fourth chapter

In 2018, the Indo-US relations took a turn towards the south. President Trump terminated India’s preferential trade status, part of a 50yr old program that allows products from developing countries to enter the U.S. market duty free. Trump claimed India has not provided “equitable and reasonable access” to its own market. In retaliation, India slapped tariffs on twenty-eight U.S. products.

In 2020, President Trump made his first official visit to India. India agreed to purchase US$3bn worth of military equipment. However, the two countries could not resolve pending trade issues. Opinions remained divided over agricultural products, tariffs, and other areas.

In 2020 the first in-person meeting of Quad was held, and President Biden hosted Prime Minister Modi for the first time.

In 2023, the Initiative on Critical and Emerging Technologies (iCET), an agreement that aims to expand bilateral technology and defense cooperation is announced. As part of the deal, U.S. officials seek to reduce India's purchase of Russian arms.

Fifth Chapter

I guess, President Trump might look to begin a fresh chapter in the Indo-US relations. Early indicators are pointing that he may look to base the mutual relationship on equality. So far, the US has played the role of a dominant partner helping India to grow faster. President Trump may now seek to rebase the relationship seeking full reciprocity from India on key economic, trade and technology issues.

The Indo-US relationship henceforth may become purely transactional, shedding the pretense of strategic partnership. The Trump 2.0 administration would negotiate hard on tariff concessions; preference in defense and energy procurement; resolution of contentious issues like agriculture tariffs. The US negotiators might use the façade of freedom of speech & religion, persecution of minorities etc. as key negotiating tools.

It will obviously be a tough & volatile transition; especially when the domestic economy is passing through a challenging downcycle. During the previous transitory phases (1970s and Late 1990s), India managed well. Hope this time will not be different. Till then keeping fingers crossed, seat belt tightened, and store filled with emergency supplies.

In the past couple of months, since the completion of the US presidential elections, most of the global analysis (financial, geopolitical, economic, international relations, etc.) has been revolving around the likely policy stance of the Trump 2.0 administration. Various scenarios have been built based on extrapolating his election speeches and other utterances made during Trump’s election campaign.

The 45^th President of the United States of America (POTUS), Mr. Donald John Trump (Trump) has assumed office with an onerous promise to “Make America Great Again” (MAGA). In the past two months, POTUS and some of his team members have expressed their intention to implement radical policy changes in a variety of spheres.

A close study of the entire election campaign of Trump, his actions during his previous presidential tenure (2016-2020), his selection of team members for his latest presidential term, and his various utterances since the election results in November 2024, would reveal that as of this morning MAGA is mostly an aspirational slogan lacking a credible conceptual framework. For example—

·         Trump has spoken about strict border controls, tougher immigration rules, and restrictions on the skilled worker visa (H1B) program. Presently, many US corporations which would play a pivotal role in MAGA, have first generation immigrants as their top executives. There is an acute shortage of skilled tech workers in the US. MAGA would require a large number of new infrastructure construction projects requiring cheap labour. There is a sharp decline in the total fertility rate of the white native Americans; hence the demographic balance and stability of the US largely depends on the immigrants. Ironically, there is an abundance of immigrants in the governance team nominated by Trump. In fact, Trump is relying on South Africa born Elon Musk and Vivek Ramaswamy (born to Indian immigrants, and reportedly already considering withdrawing) to marginalize the infamous American Deep State.

·         Trump has been talking about adopting the pre-WW1 doctrine of isolationism (policy to not interfere in the geopolitical affairs of other countries) and making the US a dominant global force in the same breath. He has announced his expansionist agenda with élan. He apparently wants to buy Greenland, acquire Canada, control the Panama Canal and claim the entire Gulf of Mexico. With this intent, he may not only be sanctifying Russian claim on Ukraine and other countries claimed by the president Putin as historical Russian territories; Chinese claim on Taiwan, Northern and North Eastern Indian territories; Israeli claim on Palestine and territories of other neighboring countries; but also pushing the world back into pre-WW1 era of persistent conflicts, and colonialism.

·         Presently, the US derives most of  its power from (i) USD (being a global reserve currency); (ii) technological prowess (largely attained through luring talent from all parts of the world with a promise of great, fair and equal opportunity); (iii) profligate American consumers, largely fed on fiscal support and debt made possible by a huge trade deficit funded by the US trade partners by accepting USD (unsecured US Fed promissory notes) in lieu of their tangible goods and services; and (iv) the promise of the US to protect democracy and human rights, affording the US government a dominant role in the most multilateral agencies, and support of NATO forces in asserting its strategic supremacy. The proposed agenda of Trump directly hits at the core of all the pillars of support of the US.

I am obviously not very enthusiastic or unduly worried about Trump 2.0. I am expecting some disruptions in the next few months, before the tempers cool down, horses are tethered, and business becomes as usual. These disruptions will definitely reflect in the Indian stock prices also. It is for experts to slog and discern this impact. I have the privilege to approach the issue in a rather simple and nonchalant manner. …to continue tomorrow

The market action in the past three days has been quite exciting. It reminded me of the market action witnessed during March-April 2020, in the wake of the outbreak of Covid-19 pandemic. Drawing from the experience of 2020, like many, at first, I was also tempted to increase my risk exposure to Indian equities. However, on second thought, I have decided to reign my temptation and avoid any deviation from the “plan”.

I note that the 2025-2026 market trajectory may not be similar to 2020-2021, for some very simple reasons.

·         Ignoring the panic fall in February-March 2020 and subsequent recovery, Nifty 50 gained 12% in 2020 and another 16% in 2021. These gains occurred because corporate earnings were coming out of a 10yr growth drought. Nifty EPS has grown over 225% in the past five years (FY21-FY25), against just 50% growth witnessed in the preceding decade (FY11-FY20). The growth trajectory is now moderating and is more likely to stabilize in 11-13% CAGR range in the next couple of years.

·         Presently, Nifty 50 forward consensus PE is marginally higher than the long term (10yr) average. With earnings growth moderating, there is no reason for the PE to re-rate to the higher levels. If at all, it can slightly de-rate to the long-term average. This implies that Nifty 50 returns are most likely to be in tandem with the earnings growth (11-13%), in the next couple of years, with some downside risk.

·         2024 has witnessed a record Rs5.26 trillion domestic flows into the local secondary market alone. Accounting for flows into primary markets, unlisted securities and foreign equities, domestic flows would be much higher. Expecting this kind of flow to sustain during 2025-2026 also, would be unreasonable. Given the currency weakness, higher cost of capital (bond yields) and rising uncertainties, foreign flows may not see a significant reversal from the 2024 trend, where foreign investors were marginal sellers (adjusted for buying in primary market).

·         The economic growth in 1HFY25 has been much below the expectations. No major recovery is expected in 2HFY25 and 1HFY26. The actual government capex for FY25 is expected to be much lower than the budget estimates. There are reports which suggest that the capex budget for FY26BE may not see any material growth. This trend raises reasonable doubts over the sustainability of the higher than historical valuations of the sectors and companies that were expected to benefit from higher government capex. For example, infra builders, PSEs, railway equipment suppliers, etc.

·         Financial sector, especially public sector banks, have contributed materially to the market buoyancy in the past four years. The rally in these banks was led by recapitalization, NPA resolution/recovery (asset quality improvement), margin expansion and high credit growth. None of these factors may be contributing in the next two years. Asset quality and margins have mostly peaked, and credit growth is moderating.

·         Last but not the last, one of the keenly watched indicators - the Market cap to GDP ratio – is at an all time high. With nominal growth trajectory settling at single digit level, and IPO activity remaining strong, the risk of market cap of the existing listed stocks correcting cannot be ignored.

As I mentioned in the preceding post, a narrative of “tax terrorism” is being built strongly on social media, against the incumbent regime. Many popular influencers are repeatedly alleging that the government is squeezing the middle classes too hard through “exorbitant” direct and indirect taxes. Numerous experts have opined that the high taxes are the primary reason for the decline in growth trajectory, especially the private consumption. The followers of these experts are quick to lament that poor infrastructure and civic amenities are totally incongruent with the current structures of direct and indirect taxation.

There is absolutely no denying that regardless of the official claims, the civic infrastructure in most parts of the country remains of poor quality and inadequate. The civic authorities are mostly inefficient, and wastage of resources rampant. Nonetheless, accusing the current regime of coercive taxation policies may not be appropriate, in my view. The taxation structure has witnessed gradual changes in the past four decades. The process has continued notwithstanding the nature of the governing political establishment.

In the past four decades we have seen governments with overwhelming majority in the parliament (Rajiv Gandhi 1985 and Narendra Modi 2019), fragmented minority (V. P. Singh, H. D. Deve Goda, I. K. Gujral) and fragile coalition (A. B. Vajpayee, Manmohan Singh). Many of these governments had communists and socialists as key constituents. The taxation structure has however continued to evolve, mostly in line with the recommendations made in 1993 by the Raja Chelliah Committee. There have been only a few ad hoc measures, like exemption of long-term capital gains on some listed securities (2004) and dividend (1997) from payment of tax, to stimulate higher growth.

Marginal rise in tax revenue during 2014-2024

Past decade has seen only a marginal rise in the overall tax revenue for the central government. Most of this rise in tax collection could be attributed to the implementation of a nationwide Goods and Services Tax (GST) which has resulted in wider coverage of taxpayers and better compliance. Improvement in digital infrastructure of tax departments has also resulted in better surveillance and compliance.

·         In the past decade (FY14-FY24), nominal GDP of India has grown at 10.1% CAGR. In this period, total tax revenue of the central government has grown at 11.5% CAGR.

·         However, most of this tax buoyancy occurred in FY17-FY19 (GST implementation period). During the past five years (FY20-FY24), nominal GDP has grown at 9.3% CAGR, while the tax revenue of the central government has grown at a lower 8.9% CAGR.

·        During FY15-FY24, average income tax per individual tax payer (including HUF assessees) has grown at 7.8% CAGR, much less than the rise in per capita income of 11% CAGR.

No material changes in the taxation matrices during FY20-FY24

Total tax revenue of the central government witnessed a jump (from 10.3% of GDP to 11.9%) during FY15-FY19 period. Most of this jump could be attributed to the implementation of GST, which led to transfer of some part of State levies by the central government.

·         During FY15-FY19 period, indirect taxes collected by the central government grew from 4.7% of GDP to 5.6%. However, in the subsequent five years (FY20-FY24) these indirect taxes have declined to 5.2% of GDP, signifying efficiencies due to single nation-wide tax.

·         Much talked about Securities Transaction Tax (STT) has grown from 0.47% of total tax revenue to 0.93% during FY14 to FY24. This has added to the cost of transaction; though much of this rise may have been mitigated by the fall in brokerage charges.

During the decade of FY15-FY24, total direct taxpayers increased from 5.26 crores to 10.41 crores. A significant part of this rise in the number of taxpayers could also be attributed to GST, which brought lots of smaller (unorganized and/or non-corporate) businesses into the tax net. Material improvement in the digital infrastructure and surveillance system of the tax department in the past decade have also led to better compliance.

·         Direct tax collections grew from 5.6% of GDP in FY14 to 6.3% of GDP in FY19. However, since FY19, it has grown only marginally to 6.5% of GDP in FY24.

·        Personal income tax collection has risen from 37.4% in FY14 to 51.8% in FY24. A large part of this collection could be attributed to non-corporate business income, which is taxed as personal income in the hands of proprietors of the small businesses. Many of these individuals have come into the tax net, post implementation of GST. 

No free food at taxpayers’ expense

The popular narrative is that the government is spending taxpayers’ money to provide free food to 800 million people to lure them to vote for it. This may not be true. The subsidy bill of the central government has been reduced from 14% of GDP in FY14 to just 2% of GDP in FY24.

The food security subsidy in India has actually reduced from 1.1% of GDP (Rs1250bn) in FY14 to 0.7% of GDP (Rs2123bn) in FY24.

I am not writing this to support or oppose any government or political party. I just want to put the record straight and avoid getting carried by the narrative being built on social media.

Also read

Myth of tax-free agriculture income

Addressing the Student’s Union of London School of Economics and Political Science in 1923, Bertrand Russell said, “One of the peculiarities of the English-speaking world is its immense interest and belief in political parties. A very large percentage of English-speaking people really believe that the ills from which they suffer would be cured if a certain political party were in power. That is a reason for the swing of the pendulum. A man votes for one party and remains miserable; he concludes that it is the other party that was to bring the millennium. By the time he is disenchanted with all parties, he is an old man on the verge of death; his sons retain the belief of his youth, and the see-saw goes on.”

The 2025^th year of the Christ is beginning on a very tentative note, particularly for investors in financial markets. The past four years have been relatively smooth for investors. With the benefit of hindsight, we can confidently claim that the markets were mostly driven by macro factors. Unprecedented liquidity infusion by the central banks and fiscal support to consumers across the world helped most asset classes to perform well.

Despite massive global disruptions due to the pandemic and geopolitical, the volatility in markets was largely contained. Since most asset classes yielded decent returns for investors, they were not really pushed hard to make choices.

However, the trend seen in the past few months is indicating that the conditions might change materially in the next 12-24 months. The macro trends may become ambivalent and unpredictable. Investors may need to make choices; and the return they would earn on their investment portfolios would largely depend on the choices they would make.

Choose your path carefully

Making right choices, in my view, would be the central investment challenge for the year 2025. The following situations, for example, would challenge investors to make a choice.

Promise vs. delivery

In the past few years, the Indian markets have been largely driven by the political and corporate promises, ignoring the actual delivery, especially in the matters of investments, infrastructure development, growth, and profitability. In the past few months corporate promises have started to moderate, albeit very gradually; but the government promises continue to remain rather exaggerated.

The themes like manufacturing for import substitution/export promotion, defense production, railways modernization and expansion, development of tourism ecosystem, clean energy, etc., which were mostly based on the government promise, have been popular with the investors in the recent years. The stocks associated with these themes have yielded extraordinary returns for investors.

Many businesses, especially those associated with these macro themes, also promised sustainable growth and profitability. So far, only a few have delivered on their promise. Very soon, investors would need to choose whether to continue relying on promises or shift the focus on businesses that have been delivering consistently.

Globally, the promises of the Trump 2.0 regime are becoming a major investment theme. The investors would also need to make an assessment of how much of Trump’s promises are deliverable and invest accordingly.

Short stories vs. epics

For ages, collections of short stories like Panchatantra, Jataka Tales, Aesop’s Fables, etc. have been key influencers of the value system, morality and consciousness of human beings. Very few of us would have bothered to read the full text of epics like Ramayana, Mahabharata. We know the broader plots and teachings of these epics through brief narrations by elders, TV shows and movies.

Similarly, most of the successful investors would have created their wealth by investing in some small ‘stories’. Investing in a broader macro trend (epics) requires a lot of patience, deep understanding of economics and deep pockets to weather through the macro cycles. For the impatient, small investors with low understanding of economic cycles, macro trends intermittently provide a lot of excitement. Extraordinary profits made riding popular waves, if not encashed in time and preserved, often perish in no time.

Anecdotal evidence suggests that a lot of investors are presently invested in “the epic India story”. It is important to note that this story has been unfolding since the early 1990s, and might take many more decades to fully unfold. In the past 34 years there have been many periods of rejection of this story as a valid investment theme. 2025-2026 could be another phase when a large section of investors, especially foreign investors, reject this story as bogus.

Small investors thus need to make a choice whether to stay invested in ‘the epic India story’ (macro themes like infra development, demographic dividend, rise in income & consumption etc.) or focus on finding some small stories that may yield results in the short period of time.

"MAGA" and "BRICS as a unified market with common currency" are some examples of global epics, which investors might need to accept or reject.

Jingoistic defiance vs. pragmatic escape

The year 2025 might bring many investors face to face with ground realities – social, political, and economic. Many of them may discover that their current portfolios of investment are not actually in sync with the current ground realities. Investors would need to make a choice whether to stay committed to their current asset allocation and investment portfolios; or make a strategic change and bring the portfolios in sync with the latest ground reality.

This may, for example, require rationalization of tactical debt allocations made to take advantage of sharp fall in bond yields; evaluation of gold allocation made in anticipation of easing bond yields & rising geopolitical tensions; and investment in traditional FMCG businesses which are facing margin & growth challenges.

Absolute vs relative return

With a material rise in the investments made through professional investment managers (MF, PMS, AIF etc.) in the past four years, investors have become used to assessing the performance of their investment portfolios relative to the benchmarks set by these professional investment managers. The relative return argument (or “strategy” if you prefer to use this jargon), functions well only if the benchmark continues to provide positive returns consistently. For those investors who are depending on their portfolio of financial investments to meet key goals of their life, e.g., financial freedom and retirement planning etc., a couple of years of negative return could spoil the entire math.

The investors whose investment objective involves any one or more of the following ought to prefer an absolute return strategy, instead of a relative return argument. For their investment objective would invariably involve a defined cash flow over a definite period of time. Their investment strategy must therefore focus on making a reasonable rate of absolute return over the “defined” period of time. Beating the benchmark index should be the least of their concerns.

·         Retirement planning – regular income to supplement the loss of salary/wages.

·         Goal based investment, e.g., buying a house, children education expense.

·         Financial freedom - assured minimum income to allow

2025-2026 could be one such period where non-institutional investors might have to make a choice between relative return and absolute return strategy.