Do it yourself

The Indo-US relations have never been linear and secular like Indo-Russia (Indo-Soviet) relations. Moreover, the Indo-US relations have mostly been transactional and opportunistic; with very little connect on cultural and social level.

The first half of the financial year FY26 has been good for financial and commodity markets in general. Despite elevated geopolitical concerns, renewed trade war, slowing growth in major economies and emerging deflationary pressures, stock market, crypto assets, and precious metals, and industrial metals performed rather well. Energy and soft commodity prices were lower, indicating good price control. The global central bankers accordingly remained on the easing path.

India however was an outlier in the global context. Indian equities, currency and bond markets were one of the worst performers globally. South Koren equities were the best performing equities in 1HFY26. Chinese and German equities were other notable outperformers. Equity indices of the US, Japan, and the UK also recorded strong gains.

The most notable feature of global markets was the sharp rally in precious metal. The central bankers across emerging markets accelerated their gold accumulation, in view of the geopolitical developments and trade tensions. Silver also joined the rally in the past few months.

India performance – 1HFY26

Indian markets were one of the worst performers globally; sharply underperforming the peers. A short war with Pakistan, several punitive actions (tantamounting to virtual economic sanctions) by the US, slowing earnings growth amidst lagging consumer and investment demand, and persistent selling by the foreign investors weighed heavily on Indian equities and INR. The bond market was also sluggish, with the yield curve steepening. The efforts to stimulate demand by allowing income-tax and GST concessions have so far not yielded the desired results. Regulatory measures to curb excessive speculation in the market impacted overall volumes and level of activity.

The key highlights of the India market performance could be listed as follows:

·         The benchmark Nifty50 gained 4.6% during 1HFY26; while the Midcap (+9.4%) and Small Cap (+9.1%) did much better. Consequently, overall market breadth was positive.

·         Most of the market gains came in 1QFY26, prior to US penal tariffs coming into effect from July 2025. However, four out of six months yielded positive results.

·         The total market capitalization of the NSE is higher by ~9.2%; much more than gains in the benchmark indices – implying that stronger gains have occurred in the broader market.

·         PSU Banks, Metals and Consumer discretionary, were the top outperforming sector. Media, IT Services, pharma, Realty, FMCG, and private banks were notable underperformers.

·         Institutional flows to the secondary equity markets were positive for all six months. 1HFY26 witnessed a total flow of ~INR3154bn, despite net FPI outflow of ~Rs684bn. The correlation of institutional flows with Nifty returns was average (~56%).

·         The bond and currency markets were particularly weak in the 1HFY26. INR lost materially against most major currencies, e.g., GBPINR (-10%), EURINR (-14.6%), JPYINR (-9%) and USDINR (-3.6%). Benchmark yields are higher by 1.5%, despite 75bps cut by RBI and strict control over fiscal deficit. Lending and deposit rates were lower by ~50bps. Call rates are lower by 50-75bps.

·         The overall Indian yield curve shifted higher and steepened. Sharply.

·         The economic growth for FY26 is expected to remain flat at 6.5% (same as FY25). Fiscal balance is expected to be better with FY26BE fiscal deficit projected at 4.4% (vs FY25RE at 4.8%).

·         CPI inflation has eased significantly, averaging below 2% in the 2QFY26, much below the RBI tolerance band. Though RBI expects the inflation to pick up in 4QFY26, professional forecasters are predicting it to stay lower than 4%.

·         Corporate performance in 1QFY26 has been slightly better than the modest estimates, but signs of long-term earning trajectory slowing down are conspicuous.

The unincorporated sector, popularly referred to as the unorganized or informal sector, – comprising millions of small manufacturers, traders, and service providers – is indubitably the backbone of India’s economy. While informal in structure, it is deeply formal in impact: generating livelihoods, fostering entrepreneurship, and contributing significantly to the country’s GDP.

A consistent rise in global equity prices, not accompanied by a matching earnings growth, has raised concerns about the sustainability of current valuations. In particular, the tech sector valuations in US technology have raised alarms. Several reports have highlighted that the market conditions and investors’ sentiments bear a stark resemblance to the dotcom exuberance (1999-2000) period, and as such markets may have already crossed the fairness redline and moved over to the realm of bubble. ​

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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

 Continuing from yesterday...(see here)

Rising uncertainties

In the past one year, global economic uncertainties have intensified, contributing to a marked slowdown in growth projections—from around 3.2% in 2024 to 2.3–3.0% in 2025—amid persistent disruptions that have eroded investor confidence and trade flows. This volatility stems from a confluence of interconnected factors, including policy unpredictability, deteriorating fiscal positions worldwide, and escalating geopolitical tensions, which collectively amplify risks of financial instability and reduced productivity. ​

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Economic policy uncertainty

Economic policy uncertainty (EPU) in the US has surged to levels roughly double its long-term average since 2008, exacerbated by the 2024 presidential election and subsequent shifts toward looser regulation, tax cuts, and aggressive tariffs. These US-centric changes have spiked trade policy uncertainty to record highs in early 2025, prompting front-loaded imports and market volatility, while hindering global investment as firms adopt a "wait-and-see" stance. ​

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Globally, this unpredictability—compounded by inflation divergence and abrupt financial tightening—has led to capital outflows from emerging markets and a broader erosion of business confidence.​

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 Worsening fiscal imbalances globally

Fiscal strains have deepened across both advanced and developing economies, driven by post-pandemic debt accumulation, demographic pressures from aging populations, and reduced fiscal buffers amid tepid growth.

In the US, expected fiscal expansion alongside tariffs has fueled concerns over sustainability, while in emerging markets, declining export revenues and aid flows heighten debt distress risks. Least developed countries face particular vulnerability, with growth slowing to 4.1% in 2025 and fiscal space shrinking due to high interest rates and social unrest from cost-of-living crises.  These imbalances threaten medium-term growth, necessitating urgent buffer rebuilding and structural reforms.

Widening Geopolitical Conflicts

Ongoing conflicts in Ukraine, the Middle East, and heightened US-China tensions have fragmented global supply chains, elevated energy and food prices, and introduced unpredictable shocks, ranking state-based armed conflict as the third-highest global risk for 2025.

Geopolitical risks, including cyber espionage, have spiked, disrupting trade (projected to halve to 1.6% growth in 2025), and adding risk premiums to commodities. This fragmentation fosters rival economic blocs, reduces supply capacity, and amplifies inflation, with escalation scenarios potentially driving oil prices 30% above baselines.

Overall, these dynamics signal a shift toward a more shock-prone, low-growth world, underscoring the need for multilateral cooperation to mitigate downside risks and foster resilience. Which unfortunately is not happening. In fact, recent events have highlighted that the global leadership might be progressing in the reverse direction.

The following are some of the noteworthy events giving rise to global uncertainties: Saudi Arab-Pakistan strategic agreement, Israel attacking targets in Qatar; the US demanding possession of Bagram airbase in Afghanistan; Russian jets and drones transgressing into neighboring countries; the US intensifying sanctions on India (penal tariff of 25%, extraordinary fee on H1B petitions; threat to leave Chabahar port in Iran); Iran and threatening other trade partners with sanctions over buying Russian oil; widespread civil unrest in several European countries against immigration policies

Conclusion

·         Uncertainty remains elevated globally, though there is some modest easing in financial / macro uncertainty, but not enough to suggest a return to stable, low-uncertainty conditions.

·         Inflation expectations are creeping up in the short to medium term, especially over 5-year horizons, though not exploding. Uncertainty about inflation is somewhat contained short-term but more diffuse long term.

·         Fiscal deficits (especially in the US) are large and projected to remain so; that is feeding into risk premia and possibly inflation expectations.

·         Market interest rates are sensitive to fiscal imbalance: higher debt projections / deficit forecasts are already pushing up yields / forward rates somewhat.

·         Global asset prices might be diverging, a little too far, from the economic realities, and therefore, remain susceptible to a sudden and sharp correction.

Also read

Dark clouds gathering on the horizon - 1

 The events of the past two months clearly point towards deteriorating global growth prospects; rising economic uncertainties; and widening geopolitical and trade conflicts. Market participants ought to take note of these dark clouds gathering on the horizon.

Deteriorating global growth prospects

The US economy flirting with stagflation

The US Federal Reserve cut its target interest rate by 25bps to 4%-4.25% last week, after a pause of nine months. The fed officials now estimate two more cuts in the next three months. The Fed decided to continue reducing its securities holdings (Treasury, agency debt, agency mortgage-backed securities) as part of its balance sheet runoff.

·         Economic growth has moderated in the first half of the year. Consumer spending is weaker; and housing remains weak.

·         Core inflation is still above the Fed target. The Fed Chairman, Jerome Powell, described the rate cut decision as a risk management measure. He admitted that there is tension between the goals of maximum employment and stable prices; because inflation remains too high while employment risks are rising.

·         In the Fed's opinion, downside risks to employment have increased. There is more concern about labor market weakness than before. Unemployment has edged up (around 4.3% in August). Job gains have slowed significantly. Reportedly, workers out of work for 27 weeks or longer – rose to 1.9mn in August 2025, up 385,000 from a year earlier. These workers now make up 25.7% of all unemployed people, the highest share since February 2022. Persistent long-term joblessness often signals deeper cracks forming in the labor market. Initial claims for unemployment insurance jumped by 27,000 to 263,000 for the week ending Sept. 6.

Most experts believe that under the current circumstances, the Fed may not venture into aggressive easing. QE may not be a viable option given the inflation concerns and aggressive rate cuts may also not help.

Chinese economy facing slow down amidst structural challenges

China has been a major growth engine for the global economy in the past couple of decades. The engine has been showing distinct signs of fatigues in the post Covid period. The Chinese economy grew 5.3% in the first half of 2025, with 5.4% in Q1 and 5.2% in Q2. Industrial output and fixed‐asset investment are weakening. Retail sales / consumer spendings are soft. Property sector continues to drag the economy. Deflationary pressures are mounting.

Growth is widely forecasted to continue slowing, especially in H2 2025, unless strong policy stimulus revives private spending. Some forecasts expect Q3 and Q4 growth to dip below 5%, possibly closer to 4%. Inflation (especially producer and export prices) being weak is threatening to turn into a wider deflation risk. Real estate sector remains a key risk area — both for financial stability and for overall growth.

Structural challenges

·         China’s historical growth model that is heavily reliant on investment, exports, and property, is hitting diminishing returns. Slower labor force growth, aging population, and less efficiency gains also poses a serious structural challenge to the Chinese economy.

·         Tightening financial regulations on developers, falling property prices, and declining real estate investment is feeding into weaker household wealth and local government revenues.

·         After COVID-19 disruptions and regulatory uncertainty, households demand remains weak and not showing much sign of an imminent recovery.

·         Trade tensions (tariffs etc.), shifting global demand, and competition. Export growth has helped in some months, but exports to certain markets have dropped sharply.

European economy showing no signs of improvement

The economic growth in Europe continues to be weak. The European Commission’s Spring 2025 forecast projects ~1.1% growth for the EU overall, and about 0.9% growth in the euro area for 2025 — roughly flat compared to 2024. The deflationary pressures are intensifying. Inflation is expected to drop from ~2.4% to ~2.1% in the euro area in 2025, and further in 2026. Business sentiment in the European economy is weakening, especially among firms exposed to export competition, global trade tensions, and supply chain disruption.

The factors impacting European growth are both cyclical and structural. Therefore, some rebound is expected in 2026, especially if investment picks up and disinflation completes, possibly helping consumer real incomes. However, there is less visibility about improvement in structural factors, in the near term.

Cyclical factors

·         After the Russian invasion of Ukraine, energy supply disruptions (especially natural gas) plus high energy prices raised costs for both producers and consumers. Though prices have retraced somewhat, energy components of costs are still significantly higher than pre-pandemic in many places.

·         To fight inflation, central banks have raised rates. That increases borrowing costs, weighs on investment (especially in manufacturing, construction), and slows demand.

·         Tariffs and trade policy uncertainty (both with the U.S. and more broadly) are hurting export demand.

·         Consumer confidence remains fragile: households are still dealing with high inflation (food, energy), rising living costs, and economic uncertainty. That reduces spending.

·         Investment cycle is not picking up due to higher cost of capital, uncertain regulatory / policy environments, and energy & supply risks.

Structural factors

·         Competition from Asia and China (especially low-cost manufacturers) is squeezing European exporters.

·         Shifts in supply chains and demand patterns post-COVID are disrupting traditional trade flows.

·         Productivity growth has been sluggish in many European countries, as demographics are worsening and investment in tech innovation has been lagging.

·         Regulatory burdens, fragmented capital markets, and slower innovation are holding back private investment and scaling up.

·         High energy costs and environmental transition costs also pose competitive disadvantages relative to regions with cheaper energy or more efficient infrastructures.

·         Civil unrest in many major European economies is becoming more deep rooted with rising resentment against immigration policies and rising youth employment.

Japanese economy also facing specter of stagflation

Japan’s economy recently contracted (-0.2% in a recent quarter), largely driven by falling exports. Demand from major trade partners is weakening. U.S. tariffs on Japanese goods (especially autos and parts) are hurting its export-heavy industries. Inflation has remained above the Bank of Japan’s target (2%) for some time. Food, energy, and import costs (exacerbated by a weak yen) are contributing to higher consumer prices. Moreover, while inflation is persistent, wage growth has been slower, so real income gains are modest.

Growth is expected to remain modest. Most forecasts point to ~1.0-1.2% real GDP growth in FY2025, assuming global demand holds and domestic consumption strengthens. Fiscal pressures continue to mount as interest costs are rising; resulting in less fiscal space for stimulus or cushioning shocks. External risks (trade, global slowdown, currency fluctuations) also remain elevated. For example, stronger yen is hurting exports; and U.S./China trade policies are adversely impacting demand for Japanese goods.

Two major constraints for the Japanese economy are:

Demographics & labor constraints: Japan’s population has been aging fast, and the working-age population is shrinking. This means fewer workers, more spending on healthcare/pensions, and fewer taxpayers. Labor shortages in certain sectors are putting upward pressure on wages, but this comes with trade-offs (cost pressures for businesses, especially smaller firms).

Monetary Normalization: The Bank of Japan has begun to shift away from ultra-loose monetary policy (e.g. raising short-term rates to ~0.5%, reducing purchases of government bonds / ETFs). This helps combat inflation, but carries risks: higher borrowing costs for companies and government, and stress for debtors.

These two are mostly structural and may keep the growth rate of the Japanese economy under check.

…to continue tomorrow.