Reflecting on 2025, Positioning for 2026

Happy 2026, everyone.

2025 was a disappointing year for our portfolios. For the full year, we are down -5.3% & -16.8% on Surge & Adaptive Momentum respectively, as against 10% & 6.1% for Nifty 50 & NSE 500.

In this note, we will walk through what went wrong in 2025, what worked & how the portfolios are evolving as we enter 2026.

In this letter, I will discuss the bets that worked, ones that didn't, some biases we leaned into and learned a lesson and more importantly, share how these learnings are shaping our position going forward.

2025: A year of reset

2025 has shown us that geopolitical risks are now a permanent feature. A large part of global trade sentiment now runs on Truth Social. This is likely to continue for the next 1100 odd days, and we will have to adapt to it.

On the India-US trade deal, if it had to happen meaningfully, it would have happened by now. For one reason or the other, it keeps getting delayed, and markets have reached a stage where it is “good if it happens, ok if it doesn’t.” Thanks to the rupee depreciation we have seen over the last year (down -5%), some of the impact has been cushioned, and much of the remaining uncertainty appears to be discounted. Happy to be wrong here if we finally get a real announcement, not just the progressing-well commentary we keep hearing.

Coming to India, this year was nothing short of a crazy ride in terms of news flow, the most volatile since the COVID years. On the positive side, we saw once in a decade events like GST 2.0 and income tax rate cuts, along with strong RBI support via OMOs worth 2 Lac Cr and rate cuts of 125 bps. On the other hand, we saw the Indo-Pak conflict, FII net selling of over 3 Lac Cr, the rupee touching 91, and nominal GDP growth slowing to 8.7%.

While on the face of it, the Nifty 50 delivered 10% returns in 2025, the broader market has largely been consolidating for the last 15 months. Valuations have corrected, earnings are slowly catching up, and return expectations have moderated. A reset is clearly in progress.

Portfolio performance

It has been a difficult year for both Surge India and Adaptive Momentum. Let’s spend some time dissecting each.

Surge India

Surge is our fundamental discretionary portfolio where we invest in emerging themes. For most of 2025, performance was broadly in line with the benchmark. However, in the last three months, there has been a clear divergence.

As we speak, Surge has a drawdown of -7.4%, compared with -2.1% & -3.6% for Nifty 50 & NSE 500. Drawdowns like these are part of investing in emerging themes. Importantly, our conviction in the underlying fundamentals remains intact, and we continue to track execution closely. At the same time, position sizes have been reassessed to ensure recovery does not hinge on any single name.

Errors of commission

Kaynes Tech

Our initial entry in Kaynes was in 2023, when ESDM was emerging as a strong theme. With PLI incentives and companies moving up the value chain, Kaynes executed well and gradually became a core holding, the third largest position by October 2025.

The stock peaked near 7600/- and then started drifting lower. Initially, this felt like a routine correction in a high beta stock. Over the next two months, it fell by around -30%. In early December, a Kotak report raised certain allegations. By then, I believed much of the damage was already priced in, the classic “itna gir gaya, aur kitna gir sakta hai” bias.

I was wrong.

The stock fell another -30% from there, nearly -50% from the highs. We exited the majority around 4100/- and sold the remaining portion subsequently. For now, we are staying out of the name.

In hindsight, this drawdown could have been handled better, particularly on position sizing & technical signals, and this has been an important learning.

Other investments that did not work as expected this year:

• Ganesh Housing: value trap
• Ajax Engineering: another value trap, though a quality business. Will revisit if growth returns
• Sudarshan Chemicals: under-estimated the global chemical downcycle & delays in Heubach integration
• Hyundai: choosing the second best when the market leader was available
• Power India: Entered late in the power cycle. We have since exited most power utility exposure, except GVT&D, at around 1.8%

Errors of omission

Gold
The setup was visible. De-dollarisation, geopolitical stress, and central bank buying. We did initiate exposure, but failed to scale it meaningfully. Partly due to thinking we were late, and partly due to our natural equity bias. Of course, we participated a bit via MCX & Manappuram. But it could have been better.

Private mid-cap banks
Improving fundamentals, strong foreign capital inflows in the form of PE and strategic deals, and comfortable valuations drove strong returns in names like AU Bank, RBL, and Federal Bank. We missed participating largely due to already high exposure to financials.

Uptick in CV cycle
Not a complete miss, but delayed. We were tracking Ashok Leyland & Tata Motors CV post demerger. Indicators now suggest the CV cycle is turning positive. Stocks have run up, but the cycle still looks early, and we may enter on meaningful pullbacks.

There is no way to eliminate mistakes completely. The only goal is to make fewer mistakes and, more importantly, low-impact mistakes.

What worked

Not everything disappointed. We had some strong contributors like MCX, M&M, Airtel, CarTrade, Belrise, Manappuram, and BSE. We will discuss these in more detail in the upcoming webinar.

A few points worth reiterating

• We are not buy & hold investors. We actively manage positions, exiting stocks that consistently underperform and adding to those that deliver. Over time, returns come from the combination of earnings growth and PE re-rating.
• We operate in probabilities. Being wrong is inevitable; the objective is to limit damage when wrong and let winners compensate over cycles.
• Losses compound fast, which is why risk management through position sizing and diversification is central to our process. We add when odds improve and trim when things move against us. Still, once in a while, Kaynes type situations do happen, and we have to acknowledge that as part of investing.
• We also use technicals primarily for position sizing.

Adaptive Momentum

There is very little momentum in the broader market right now. Markets test us during phases like these, but it is the ability to stay steady that usually creates the edge.

If history is any guide, periods of frustration in momentum are often followed by strong rebounds once markets find direction. We are positioned to participate when that happens, while staying disciplined in the meantime.

We continue to refine the algorithm, as we always have, through proper backtests and careful implementation. The core idea of owning stocks with strong upward trends remains unchanged. What evolves are the tactical elements, how much to buy, when to enter, and when to exit.

I want to assure you that we remain fully committed to this strategy. Early signs are encouraging, but it is still too early to draw firm conclusions.

2026: A year of opportunity

We are entering 2026 after nearly 15 months of sideways markets.

On the positive side:

• Starting valuations are reasonable, though mid and small caps remain expensive
• India’s share of the global market cap is around 3.5%, last seen in 2022
• Scope for mean reversion in FII flows

On the not-so-good part:

• No immediate growth trigger
• Limited fiscal headroom from the government
• Capex growth has cooled to around 10.8% YoY
• GST 2.0 and tax cut impact will moderate due to base effects

As Deepak says, don’t predict, respond. The sensible approach is to zoom out, filter noise, focus on sectors and companies, and stay invested where fundamentals deliver, while remaining open to new opportunities.

Themes we remain bullish on for 2026:

• Premiumization & aspirational consumption
• Financials
• Capital markets
• Industrials
• Mid-cap IT
• Healthcare

As we enter 2026, return expectations are more reasonable, valuations healthier, and opportunities more selective. Our focus remains steady compounding.

Q3 has started, with full GST impact & the Union Budget around the corner. We are holding around 10% cash, which we plan to deploy gradually as opportunities emerge.

To summarize

2025 was a year that tested patience, conviction, and process. We did not get everything right, & the outcomes reflect that. At the same time, the learnings from this phase have been real & actionable, and they are already shaping how the portfolios are positioned today.

Markets have done a lot of the hard work over the last 15-18 months. Valuations have cooled, expectations have reset, and opportunities are beginning to emerge more selectively. We may not know what the next trigger will be or when it will come, but we remain focused on what we can control, risk management, and staying invested in businesses that continue to deliver.

We remain aligned, committed, and fully accountable as we navigate the next phase of this cycle together.

With calm conviction,

Krishna Appala