Blog

The Smoke is Clearing. Maybe.

Krishna Appala — Fri, 10 Apr 2026 05:54:19 GMT

The world broke a little in the last 2 months & kind of came back in the last 2 days (until the next tweet).

We have seen this before. Not this exact war, not this exact strait, but this maahoal. Markets hate this uncertainty more than they hate the bad news. Bad news gets priced in. Uncertainty just gets into that blanket sell mode (the sequence goes something like, Sell that is profitable, sell that has liquidity, sell anything that can be sold & then finally sell in panic). I think we have passed that sequence & are going through the base formation phase. Not a prediction, just going by the historical market breadth indicators & selling exuberance we are seeing in some counters.

Coming back to the geopolitics:

After a bunch of deadlines & a couple of TACOs later, we now officially have a ceasefire for two weeks. But what is even official nowadays? A lot of noise, proposals, counter-proposals, deadlines that come and go. Both sides are sitting in a position where saying yes first feels like losing face. These things don't resolve over a weekend. They resolve only when the pain of continuing becomes more than the pain of compromising, which looks like it’s happening now.

In this overstimulated, hyperactive, breaking news every five minutes world, I have stopped trying to track who said what to whom. There is only one indicator I trust. We can call it the wisdom of the crowd - Brent Crude. The market for oil doesn't care about press releases or Trump's Truth Social posts. It cares about the actual supply coming back. Watch crude. Everything else is noise. For now, Crude says a ceasefire is a possibility.

So what does this mean for India?

The rupee told the real story, though. Record lows. FIIs sold -1.2 Lac Cr in March & around 26k Cr in Apr (as of Apr 6th). Nifty down over 11% in March (Only 18 other months saw a 10% or worse fall in the last three decades. Let that sink in for a bit).

Fear just went everywhere, the way it always does when nobody knows how deep the hole is. This is normal. It feels abnormal when you are inside it.

But here's what's interesting: the actual companies didn't really break. Auto monthly numbers held. Bank credit seems to have done well in nearly all areas, and both Industrial credit & personal loans are growing at a 12-14% YoY.

The stocks fell, but the businesses just kept doing what they do. The market was selling fear. Companies were getting on with it. A typical bottom-up market, if you may call it.

Are we going to see a V-shaped recovery?

The one-time markets bounced back like a rubber ball was Covid & that happened because every central bank on the planet printed money at the same time. That was an accident, not a policy blueprint. What we are seeing right now is different. This is a supply shock, and supply shocks put central banks in a really awkward spot. Lower rates, inflation wins. Hold rates, growth suffers. No easy answer either way.

So what we expect is more of a consolidation. Market builds a base, consolidates, and then, quietly, before most people even notice, the companies with real earnings start to move first. The broad market follows later.

The Q4 & Q1 earnings damage is more or less already priced in. Market will look through it & shift, from pricing fear to pricing earnings again. That is exactly what we're getting ready for.

Coming to the portfolios now:

Surge India: We were down -9.8% as compared to -11.3% for Nifty 50 TRI in March.

Right now, we are holding ~34% of cash, which we will deploy over the next few weeks/months depending on the market conditions. We continue to like a few names like financials, autos, auto ancillaries, energy, consumption, etc. We are looking for one strong trend to emerge (the likes of previous bull market trends like EMS, value retail, building materials, housing finance, speciality chemicals, CDMO, etc.), which right now we don't have. Once we find the one we are sure to ride; that is where the biggest money will be made.

Our top allocation & high conviction will continue to be towards names like Airtel, BEL, M&M, Belrise, BSE, TVS, ICICI AMC, etc. As of now, we don’t have allocation towards Pharma & IT. Post the recent fall, IT has started to look good & some of the good pharma names are showing healthy growth prospects over the next couple of years. We are looking at some of these names.

We have been conservative since Oct (to move to large caps & cash). This helped us to navigate the last few months with relatively lower volatility. On the cash levels, we will deploy it back mostly in the existing & few new names as well.

New secondary benchmark added: We have also added a new secondary benchmark for Surge India - Nifty500 Multicap 50-25-25 TRI. This Index allocates 50% to Large cap, 25% each to Mid and Small caps. This is the closest to our kind of strategy from the APMI-prescribed benchmarks for the PMS. With this, both our primary benchmark, Nifty 50 TRI and secondary benchmark at Nifty500 Multicap 50-25-25 TRI, we will have a good overview of how the strategy is doing as compared to broader indices in the long term.

Adaptive Momentum: This strategy is down -9.4% as compared to Nifty 50 TRI at -11.3%. The strategy is going through the toughest period it has seen since the 2017-19 period. The Momentum thematic indices were down -25% to -30%. These are tough times & investors have patiently sat through the downcycle in the last 2 years, with the expectation that the upcycle for the momentum factor will come back.

We continue to have conviction in our strategy and momentum as a factor. However, we cannot time the exact turn. We have already made implementation-level refinements to our portfolio construction, but our core strategy of buying stocks that are trending up and selling the ones that are losing momentum stays the same. We still believe in momentum and are focused on making the strategy steadier, more reliable, and ready to perform when markets turn stronger.

Given the current market conditions, we are holding ~45% in cash. Till about three days back, there was absolutely no momentum in the markets. Slowly, we are starting to see the market show some momentum.

On the mutual fund portfolios:

All Weather Equity & Altitude (formerly known as SmartCore): Both strategies continue to perform well and are comfortably ahead of their benchmark since inception. They adapt well to volatile markets, they invest across the best-performing mutual fund categories (flexi-cap, mid & small-cap, focused) and provide necessary balance on the overall portfolio. These are low churn strategies by design & if you are looking to deploy cash but prefer not to take direct equity exposure, these are well-suited strategies for that.

Anchor: Our New MF Strategy

We are launching a new mutual fund strategy called Anchor, designed to deliver stable returns in a tax-efficient manner, with lower risk and volatility compared to a pure equity approach.

Like our other mutual fund strategies, this is rule-based, combining our in-house quantitative shortlisting model with a layer of informed discretion. We will be conducting a webinar to discuss more on this further in the next few days. You will be receiving information on the same.

If you want to get a sense of the thinking behind it before that:

To conclude,

The last few days have been good. Markets moved up nicely, and there is a certain relief in the air. But let's not get ahead of ourselves.

We are not out of the woods yet. In the foreground, you have the war that has a ceasefire but not a conclusion. In the background, quietly sitting there, are Japan yields starting to move and US private credit. Add to that, no real liquidity globally, FIIs who haven't stopped selling, and a rupee that is still weak. Oh, and one random tweet from Trump is enough to undo all of it in an afternoon.

Among all this noise, we will do what we always do: keep our eyes on what actually matters. Q4 results start coming in from next week. That's where the real story is. We take it one day at a time.

Ending this note with a quote from Scott Adams (RIP) that feels especially apt today:

“When a decision involves lots of facts, and we have access to all the facts, we are more likely to hallucinate that we used our powers of reason to reach a decision. But when we recognise that we don’t have all the facts, we hallucinate that we used our gut feeling to bridge the gap. In both cases, we acted irrationally, and we tried to rationalise it to ourselves after the fact. That’s how the Persuasion Filter sees it.”

― Scott Adams, Win Bigly: Persuasion in a World Where Facts Don't Matter.

Riding through the smoke,

Krishna Appala

Buying Into the Fear

Krishna Appala — Tue, 10 Mar 2026 09:20:37 GMT

Operation Epic Fury changed everything for global markets over the last two weeks. Within hours of the strike on Iran’s leadership, the IRGC shut down the Strait of Hormuz, a 33 km passage between Iran & Oman that the world can’t afford to lose. Roughly 20% of global petroleum & 20% of global LNG transits through it daily. Oil from Saudi Arabia, UAE, Iraq, Kuwait, & Qatar all of it flows through this single corridor.

Brent crude, which was hovering around $67 in Feb, has now touched $105 per barrel. I had to update this figure four times while writing this letter. That alone tells you how fast things are moving.

Direct Impact on India

India imports roughly 88% of its crude oil. Here’s how our sourcing breaks down: Russia accounts for ~37% of imports, Persian Gulf nations (Iraq, Saudi Arabia, UAE, Kuwait, Iran) account for ~46%, and the remaining ~17% comes from the US, West Africa, and others. Nearly half of all our oil imports come from the Gulf, and almost all of it transits through Hormuz.

The math is straightforward: every $10/barrel increase in crude adds approx $14 billion to India’s annual import bill, pushes CPI up by ~0.2%, and widens our CAD by about 50 bps. At $105 Brent, that’s not a rounding error. It changes the macro picture. The Govt has indicated that India holds 6–8 weeks of fuel supply in strategic reserves (roughly 100 million barrels). That’s a buffer, not a solution. Reserves are designed for short-term emergencies, not a prolonged supply disruption. OMCs are currently absorbing the hit through their marketing margins (~Rs. 10/litre on petrol, ~Rs. 4 on diesel). If crude stays elevated beyond 4 to 6 weeks, those margins get squeezed to zero, and that’s when we will likely see retail price hikes at the pump.

Coming to the portfolios:

Surge India is up 0.13% in Feb versus -0.51% for Nifty 50 TRI.

Auto & Ancillaries: This remains our highest-conviction allocation. We are in the sixth month of GST 2.0 implementation, and the on-ground impact has been tangible. Dealer inventory cycles are tightening & the demand is strong (Ashok Leyland Feb sales up 25% YoY, M&M Auto 15% YoY, Maruti 9.6%, Tata Motors CV 31% YoY, TVS at 26% YoY). The 2W, passenger vehicle, and commercial vehicle cycles continue to track well. Auto ancillaries like Belrise Industries (one of our stronger performers this year) and SJS Enterprises (a small-cap, debt-free business that keeps delivering quietly) complement this theme. The broader auto story of premiumisation, replacement cycles, and rural recovery remains intact.
PSU Banks: SBI and Indian Bank are names we have held in this pack. The fundamental picture hasn’t changed: credit growth remains strong at 14.5% YoY, asset quality has improved structurally, and valuations are still reasonable relative to private-sector peers.
Private Financials: Shriram Finance, Bajaj Finance, ICICI Bank, and Ujjivan SFB form a core part of the portfolio. We are comfortable holding these through the current volatility.
Our cash deployment stance: After the correction, we have started deploying our cash position at 9%. But I want to be specific about why, because “be greedy when others are fearful” without reasoning behind it is just a slogan. Here’s what we are seeing: markets have historically discounted geopolitical events within 4–6 weeks (post-Gulf War 1991, post-9/11, post-Russia/Ukraine in 2022). In each case, the initial spike in crude and the corresponding equity sell-off created a window where fundamentally sound businesses traded at a meaningful discount to intrinsic value. We believe we are in that window now. The risk we are watching is duration. If Hormuz stays closed beyond 8–10 weeks, the playbook changes, and we will re-evaluate. We are not deploying aggressively. We are adding to high-conviction names where valuations have become attractive while maintaining enough cash to act further if the correction deepens.

Adaptive Momentum

Adaptive Momentum is up 1.51% in Feb versus -0.51% for Nifty 50 TRI. A decent month, but one month doesn't change the broader picture.

The strategy has been through a difficult stretch. 2024 and 2025 were cyclical downturns for momentum as a factor, and investors who joined over the last 2–3 years are going through a rough patch.
Statistically, we are in what is roughly a 10th percentile outcome on a 3-year holding basis. It doesn’t happen often. But when it does, it tests patience. We expect momentum as a factor to revive, but we cannot tell with certainty when the tide will turn.
What we have changed: The core model, systematic stock selection and portfolio construction remain unchanged. What we have layered in is a discretionary overlay to address the edges that the model misses in volatile regimes, like acting on early growth signals before full model confirmation, tightening risk through dynamic position sizing, liquidity filters & sector rotation. Early results are encouraging better entries, tighter drawdowns in select pockets. But I want to measure this over 2–3 quarters before making any definitive claims.

Mutual Fund Strategies

All Weather Equity & SmartCore: Both strategies continue to perform well and are comfortably ahead of their benchmark since inception. By design, they adapt well to volatile markets, they invest across the best-performing mutual fund categories (flexi-cap, mid & small-cap, focused) and provide necessary balance on the overall portfolio. All Weather’s recent review confirmed all constituent funds continue to meet our selection criteria. SmartCore had one rebalance in the midcap category (HSBC Midcap replaced with Edelweiss Midcap). If you are looking to deploy cash but prefer not to take direct equity exposure, these are well-suited strategies for that.
New Strategy (Launching Soon): We are launching a new mutual fund strategy designed to deliver stable returns in a tax-efficient manner, with lower risk and volatility compared to a pure equity approach. Like our other mutual fund strategies, this is rule-based, combining our in-house quantitative shortlisting model with a layer of informed discretion. You will be receiving the detailed investment approach document from our team shortly.

Where We Stand

Right now, we are in Rahul Dravid mode. Sticking to the crease, playing tight, waiting for the loose ball, and we are already getting a few. The noise will continue. Our job is to stay focused on what we can control: earnings growth, valuations, and deploying at the right price. We are doing exactly that.

With patience at the crease,

Krishna Appala

Disclaimer: Investing in securities markets involves risk, and no specific returns or performance are guaranteed. This communication is issued by Capitalmind Financial Services Private Limited for informational purposes only and does not constitute investment advice, a research report, or an offer/solicitation to buy or sell any securities or portfolio management services. It is not directed at residents of the United States of America, UAE, Singapore, or any jurisdiction where access without proper registration is restricted. While the information is believed to be reliable, Capitalmind and its affiliates doesn't guarantee its accuracy or completeness, and shall not be liable for any loss arising from reliance on this material. Performance data, where mentioned, is based on past results, shown net of fees unless stated otherwise, annualized for periods exceeding one year, is not verified by SEBI, and should not be considered indicative of future performance. Any back-tested performance is simulated and does not represent actual client returns, which may vary due to timing of contributions, market conditions, and other factors. Please exercise independent judgment and seek professional advice before investing. This material is confidential and may not be reproduced or redistributed without prior written consent. For further details, please refer to our Disclosure Document at https://www.capitalmind.in/disclosure#disc-pms.

The Green Shoots

Krishna Appala — Thu, 26 Feb 2026 09:38:26 GMT

For the TL;DR folks:

After a long time, things are slowly falling into place: the India-US trade deal, FIIs taking a pause in their relentless selling, and most importantly, Q3 results have surprised everyone on the upside.
Sentiment is slowly turning positive. Liquidity is expected to follow.
Surge had a decent start in Jan with returns in line with the benchmark at -3.2%. In Q3 till date, the portfolio median revenue growth was at 18.3% & median PAT growth is at 19.2%, which is encouraging. We continue to hold 12% cash, which is expected to be deployed over the next few weeks.
Momentum is showing early signs of recovery. If the broader market participation continues, we expect momentum also to come back on track.
On Feb 20th, we are having our Q3 webinar. Please do join.

This is the broad crux of this letter, but in case you would like to read it in full:

Data as of 11th Feb'26 | *Performance net of fees and transaction costs | Taxes as applicable | No other hidden charges | >1 year data is annualized | Performance data is not verified by SEBI | Past performance is not indicative of future results | Investments in securities are subject to market risks. Please read all scheme-related documents carefully

The start of 2026 felt like a continuation of the previous months - volatile, broader markets under pressure, persistent selling from FIIs, and a weak rupee. However, things slowly started to turn (or perhaps, just stopped getting worse) during the first week of Feb. We can thank a combination of strong Q3 earnings and finalisation of the long-awaited India-US deal for this shift in sentiment.

The long-term returns of equity generally depend on two factors: Earnings & Liquidity. Early signs show that both are finally falling into place.

On the earnings front, Q3FY26 is turning out to be much better than expected. Of the top 100 companies, over 80 have released their results. The median sales growth stands at 11.1% YoY, with median PAT growth at 10.5% YoY. The numbers are even more encouraging for the broad market. Out of the NSE 500, roughly 400 companies have reported. Median sales growth is at 12%, while median PAT growth has surged to 16.7% YoY.
On the liquidity front, we have witnessed a correction without a global sell-off. The Indian market (represented by the MSCI India Index) is currently lagging emerging markets (MSCI Emerging Markets Index) by around 25% on a rolling one-year basis in dollar terms. On the other hand, for over two years, DIIs have essentially absorbed the liquidity pressure created by FII exits, loss making new age IPOs, promoter stake sales, and PE exits.

It feels as though the pendulum is nearing the other extreme. Just by the law of mean reversion, some sanity should soon emerge. Without the rupee stabilizing & earnings growth mentioned above, this would just be a wish. But since both are happening, it becomes a very reasonable expectation.

The state of the market is slowly turning positive. In technical parlance, we are seeing a shift from sell on rise to buy on dips. The most encouraging sign is the participation from the broader market. These are early signs, but they represent a welcome development.

Sometimes the market turns positive not because of good news, but because of the absence of incremental bad news. We may be in that phase. Most of the bad news is either already being priced in or navigated through. Unless something really turns up out of nowhere, things are expected to stabilise from here on. Let’s see.

Portfolio Updates

Surge India: For Jan 2026, the frontline index Nifty 50 was down -3.1%. Our portfolio performed broadly in line, down -3.2%. However, the underlying fundamental health of the portfolio is robust. As of Feb 10th, 2026 our portfolio median revenue growth is at 18.3% & Median PAT Growth is at 19.2%.

Earnings growth combined with sectoral tailwinds is where we always strive to position ourselves. Recent additions include:

CV OEMs (Ashok Leyland & Tata Motors): We believe the commercial vehicle upcycle still has legs to go.
Ujjivan SFB: The MFI sector clean-up is mostly done for the sector (at least for the prudent market leaders).
SJS Enterprises: A small-cap, debt-free auto ancillary company that looks promising and is also delivering consistently.
Cash Levels: We continue to hold around 12% in cash, which we will be deploying slowly as and when opportunities arise.

The idea is to position ourselves ready to make the most and participate in the next emerging trend.

Adaptive Momentum: Looks like momentum is slowly coming back in the markets, especially in the last week. Too early to assign a trend reversal, but indeed a good sign. Investors had patiently sat through the downcycle in the last 2 years, with the expectation that if things come back, we shouldn’t be left out. The positive thing in the last week is that broader market participation is strong.

We continue to refine the algorithm through proper backtests and careful implementation. The core idea of owning stocks with strong upward trends remains unchanged. As mentioned earlier as well, I want to assure you that we remain fully committed to this strategy.

Here ends the glass-half-full part. Now comes the other half:

I would like to highlight one particular point that should be the key takeaway from this letter. The post-Covid rally seen in Indian equities was an anomaly, a once in a decade kind of opportunity. Thanks to all central banks around the world unanimously deciding to let the printing press run three shifts per day, 24/7 non-stop. That kind of global liquidity, in all probability, is a thing of the past, at least for the near future. Hence, we should not benchmark our returns against the last 5 years. Just setting the expectations right here.

On Feb 20th, we will host our quarterly webinar to discuss the portfolios, market strategy, and the road ahead in detail. Please do join us. Our team will share more details with you in the next couple of days.

We have started 2026 on a satisfactory note. Wishing to see it continue.

With visible green shoots,

Krishna Appala

Reflecting on 2025, Positioning for 2026

Krishna Appala — Thu, 29 Jan 2026 19:00:00 GMT

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

Enter 2024: Here's to the crazy ones

deepakshenoy@capitalmind.in (Deepak Shenoy) — Mon, 01 Jan 2024 06:58:26 GMT

Firstly, our best wishes to you all for a Happy and Prosperous 2024! It's a new year, and like all years, it's a new beginning.

2023 has been quite sensational for returns in the Capitalmind Portfolios, as evidenced by the bars in this chart. Surge India and Momentum both did 40%+ in the year, eclipsing the Nifty's impressive 21% gain:

But enough about performance. Our goal is to ensure you're getting to where you must be, longer term, and the longer term is where the performance matters. And we've done well, thanks to a lot of luck and our emphasis on getting as much of that luck as possible.

The year seems to have a flavour of what Steve Jobs called the Crazy ones. In an Apple ad, his advert said:

Here's to the crazy ones. The misfits. The rebels. The troublemakers. The round pegs in the square holes. The ones who see things differently. They're not fond of rules. And they have no respect for the status quo. You can quote them, disagree with them, glorify or vilify them. About the only thing you can't do is ignore them. Because they change things. They push the human race forward. And while some may see them as the crazy ones, we see genius. Because the people who are crazy enough to think they can change the world, are the ones who do.

The crazy ones. The underdog. The thing that you didn't think had a chance, but it demonstrates that your thinking was wrong. That thing that doesn't have the pedigree, the taste, the sensibility...the everything that you've made a wall of, around you, it doesn't have, and then, it goes on to become the thing you want to be.

The year was about the crazy ones. In so many ways.

On the portfolios, who would have expected that the best performing stocks would be PSU biggies - PFC, REC, Mazgaon Dock and the like. PFC and REC have been cheap for years, and usually got cheaper - a P/E of 6 went down to a P/E of 2 - even as the E (earnings) went up, the P (Price) went down. Waste of time? Not in 2023 - both stocks tripled in this year. When you least expected them to.

Silicon Valley Bank - which was about the size of HDFC Bank - nearly collapsed after owning just government bonds. Credit Suisse went belly up. The war in Ukraine continues. October saw the middle east break out in flames, and a horrendous situation has emerged. Interest rates in the US rose to points where their mortgage interest rates were nearly as high as India - and real estate prices mostly stayed up. Even the US markets were up 20%+ and the Nasdaq, a cool 43%. It was almost like the year of the crazy.

Melbourne, where I've spend the Christmas/New Year holidays, has some incredible stories, just like every city has incredible stories. There was a woman named Caroline Hodgson, born in Prussia. She came to Melbourne in 1871, and proceeded to own a number of "boarding houses" (another word for brothels) within two years and ran them for 33 years, well known as "Madame Brussels". At a time when women weren't allowed to own properties, or in fact do anything of significance, she was the most well known owner of multiple such houses, and her husband was a policeman. It was at the time the only profession that women could do, and Madame Brussels is a famous name (and a restaurant) today. It must have been crazy, that time.

There are the crazy ones everywhere. Akio Morita, who pioneered the Walkman at Sony, famously said he didn't ask customers what they wanted. He'd be ready with what they needed. The big music device maker after him was Steve Jobs, said "A lot of times, people don't know what they want until you show it to them". Henry Ford was in another era, but had the same take: "If I had asked my customers what they wanted, they would have said a faster horse". Don't ask your customer what they want? Crazy.

Ray Kroc envisioned McDonald's when he was 52. Morris Chang started TSCM - the most astoundingly large chip maker - at age 54. Colonel Sanders started Kentucky Fried Chicken at age 62. Bernie Marcus was 50 when he opened the first Home Depot. Leo Goodwin started GEICO, the now-Buffett-owned car insurer, at age 50. It's not just the young that are crazy. In fact, starting a company in your 50s and having it become a world famous, ludicrously popular company? That's crazy.

We keep talking about keeping it simple. There's a dialogue in "Bleed for this" where a reporter asks a comeback boxer, Vinny:

Reporter: What was the biggest lie you were ever told?

Vinny: It's not that simple.

Reporter: Why not?

Vinny: No, that's the biggest lie I was ever told: "It's not that simple." And it's a lie they tell you over and over again.

Reporter: What's not simple?

Vinny: Any of it. All of it. It's how they get you to give up. They say, "It's not that simple, Vinny."

Reporter : [pause] So, what's the truth?

Vinny Pazienza: That it is. That if you just do the thing that they tell you, you can't, then it's done. And you realize it is that simple... And that it always was.

---

It's not easy. It's hard, and we have to uncomplicate and unlearn. But it's simple. All you have to do in the financial industry is not do really stupid things that kill you. It's that simple. It's always been that simple.

At Capitalmind, we're a motley crew. Started by a guy with no banking or financial sector experience. Most of us here, they come from non-finance backgrounds. We have people who have backgrounds in technology, fashion technology, textile operations, e-commerce sales, pharma retailing, and we all do different things than we've had a "degree" in. Pedigree is earned through blood and sweat, in our book, and in that little way, we are the crazy ones. We'll keep the crazy. And in that same vein, we'll keep the simple.

There's a famous Irish wish for a new year:

May love and laughter light your days and warm your heart and home.
May good and faithful friends be yours, wherever you may roam.
May peace and plenty bless your world with joy that long endures.
May all life’s passing seasons bring the best to you and yours.

That's for you. From all of us at Capitalmind. It's that simple. Here's to the crazy ones.

Happy 2024!

Deepak and all of us from Capitalmind

Much more to go, much more to do

deepakshenoy@capitalmind.in (Deepak Shenoy) — Thu, 11 May 2023 05:55:24 GMT

April showed us early signs of happiness in stocks, with markets cheering the RBI not increasing interest rates and in general better earnings. Surge India’s been on a tear too, and the quarterly results have been quite decent across the board - both from a net profit and a revenue perspective.

Results as of May 7, but note that a large number of companies haven’t yet reported earnings.

Earnings are growing, and to an extent, liquidity is returning. After months of selling, foreign investors added 11,000 cr. in April, and in the first week of May, have already added another 17,000 cr. to equity markets. Domestic equity support has always been strong so you get a bump up just because of the lack of selling.

We spoke of this in the last letter: that the drivers of markets, beyond earnings, are liquidity and perception, and both are changing. Perception, though, seems to have gone on the other end of the spectrum. Everyone’s suddenly gushing about how India is a bright spot in the world economy, which as a fund manager, we have to accept is true. After all, optimism is a key feature of anyone managing money. (Or as someone recently said, “Pessimists are often right. Optimists are often rich.”)

But you can’t wear rose rimmed glasses. Mostly because they look terrible. But also metaphorically, you need to have an eye for the things we lag behind in. Here’s a bunch:

Women at work: India has some of the lowest female labour participation rates in the world at roughly 32%. And no, it’s not rural women, who have a 36% participation rate - urban women only see 22%. And it’s not education: illiterate and “up to primary” educated women have 40%, while those who are graduates have only 26%. It’s criminal, in some way, that roughly half our population doesn’t participate in the workforce. To be more productive as a country, India needs to both create opportunities and remove the barriers for women workers; there’s a large amount of cultural baggage as well. The lack of enough high quality day care centres is reflective of this as well.
3D printing: The idea of printing in 3D isn’t just for making toy action figures - there is a fair bunch of actually usable things that can be made using hard plastic and 3D printing. It’s not super-cost-efficient, because that requires scale and injection moulding and that kind of stuff, but it does help in situations where small parts are a pain to procure and where precision is important. There needs to be a lot more in terms of research or scale in this field - India’s lagged behind in the equipment, and we will end up being only users, not producers in the 3D printing ecosystem.
Drones and robotics: India’s been doing a lot of work here so I might be speaking prematurely, but there’s a whole lot of automation that will help us in many ways. From the factory to the warehouse to intermediate delivery, a very large number of robotic applications will be useful in India, especially where we end up being space constrained. India needs to pick up speed in both products and applications to be on the international map.
Artificial intelligence: We have real time image generation, real time chat, and in many cases, even real time translation with the newest AI technology. In this, I’m hoping we could also get real time AI-based transcription and translation into Indian languages. This will make a lot of content accessible to many many others, without the expense or time constraints of human translators. This hasn’t yet happened, and I think it will change the whole education system in India when it does.
Health, education and poverty: The real answer to this isn’t actually money, it’s the willingness of the more well heeled among us to participate and help. Unfortunately there are way too many scamsters who exploit the donation ecosystem, so most of us just get disillusioned. The answer to health is not free medicine, the answer to education is not rote learning and the answer to poverty is not free money. These just generate feel-good metrics. It needs us to think of living conditions and ecosystems: cleaner water, sewage disposal, more nutritious food, less sugar and better walking spaces are probably better to target. India’s way behind on this, and in the long term, this is what makes a difference.

This isn’t comprehensive, but they are key areas that still need a lot more participation from India. Some part of it will be critical to generate jobs - when technology takes one job away, another will come in its place. But the rest of it is just to make lives better for the 90%+ of India that is simply not participating enough in the current growth.

But let’s bring back the optimism. Life is too short to agonise over what could have been, and what should have been. The great Terry Pratchett had this in one of his novels: “It is said that your life flashes before your eyes before you die. That is true, it’s called Life”.

We could all look at the negatives and predict a doomsday, but life happens while you’re looking and worrying. In investing, this appears to be more true - we often predict that the world will come to an end, and surprise, it never does.Things move on regardless, and stress does seem to make us stronger. Currently, three of America’s largest bank failures have happened in the last two months. The markets shrugged it off. The Swiss, famous for chocolates and banks, have seen the failure of their second largest bank. The markets decided they’d be ok. (But anyhow, please don’t mess with the chocolates). The US is staring, as it does every few years, at a debt ceiling that their political parties use as a reason to talk endlessly about what they need as a guarantee to allow the ceiling to be raised. And then, they raise it anyhow. Sure, there’s a hot summer - but there’s almost always rain. Even Covid, which brought the world to its knees, is now forgotten. (Btw, South Korea continues to have 20,000+ new cases per day, but no one cares)

We’ve become complacent, perhaps. But also perhaps, it’s meant to be that way; we fix ourselves.

Maybe we’re self serving, but so do stock markets. The eventual direction is up. In the middle there’s a lot of downs and “it’s over, it’s not coming back” type of thoughts. After a period of this kind of drawdown, we’ve always seen markets hit new highs.

That said, I’ve said this forever, and I’ll say this again: the only reason for money to exist is to be spent. Eventually, the money you create, or you invest, only has meaning if it’s used to derive your joys and happiness. Yes, you should have enough of it to not care about the little spends, but once you have enough, it should be used to give you joy. (People seem to be taking this seriously, looking at the airline ticket prices and hotel occupancy!)

Our goal is to get you there faster, to a point where you don’t need to worry. This is a good time to invest. I mean right now. There’s still scepticism, and there still may be a sharp downside, but the markets look very investable. I continue to add more to the PMS portfolios from my savings (I do that every month regardless). I’d encourage you to consider increasing your equity allocations, if you have been wondering when the right time is. (In the spirit of being less biased, invest through other vehicles or funds if you think that’s a better choice. Just commenting on the timing)

As you would have noticed, nearly all the “cash” in all portfolios is fully deployed now. Even the algorithms tell us that good times are here.

(On a happier note, we’ve renegotiated fees with our custodian yet again. ICICI Bank will reduce charges for us from May 1, which means you pay less as fees going forward!)

It’s May already. Let’s hope the rest of the results season gives us more cheer, but also, that there are more opportunities that open up for the giant that India will become. We’ll happily participate.

Deepak

Muddling Through Markets

deepakshenoy@capitalmind.in (Deepak Shenoy) — Wed, 08 Mar 2023 06:01:11 GMT

We are in a no-go zone in the market for nearly all of one year, since the Ukraine war began. The Nifty returns are just 3% to 5% which is even lesser than a fixed deposit (which is around 7% now) There’s worry everywhere, and it’s not unfounded - in fact, we would probably feel a lot better if the market was actually down 25% or something, because at least that looks like a deep enough fall for being a good opportunity.

We are in this “muddle through” market, where nothing seems to be happening on the upside and there is not enough of a downside yet. Has this happened in the past? We looked at the data for one thing:

Tell us what happens when the Nifty return is “so-so” - i.e. when it’s less than 7% positive return in the last year, but hasn’t fallen more than 10%.

The muddle-through zone is actually quite a decent time to invest, it turns out. Or even, just stay invested. Subsequent returns seem to be way better than what fixed deposits seem to offer.

Right now, for example, fixed deposits offer a nice 7% to 8%, pre-tax. With roughly 1/3rd of such returns going to the taxman, the post-tax returns are between 4.5% and 5.5%.

To beat that, equities must return around 7% in a year. Has it done that in the past?

The question we are asking is: Have equities given more than 7%, on average, whenever it has looked like the past year has been “muddle through”?

For a single year of holding, past median 1 year returns have been 11.5%.

And in fact if we go further, to a 3 year return after a “muddle through” time, it’s even better:

In the three year time frame, we haven’t seen negative returns in the last two decades. And returns are actually very very good after that time.

What this tells us is:

Staying invested in equity after a year of lousy returns (but not too lousy) is a good idea, looking purely at the past.
In a three year horizon, there has been no instance of actually losing money when investing at such a time. This doesn’t tell you it won’t happen now, it’s just that it’s not happened recently.

When the Nifty’s last one year has been muddle-through

(less than 7% return, but hasn’t fallen more than 10%)

(data since 1996)	1 year forward returns	3 year forward returns
We’ve not lost money (i.e. positive return)	87% of instances	87% of instances
We’ve seen returns more than 7% p.a.	59% of instances	70% of instances

Before we go around saying history will repeat itself, let’s tackle the other big question.

But isn’t it different this time?

We are fund managers, so of course we would say this, no? The past data is favourable to investing in equity. But so what, isn’t it different this time? Won’t the world go to hell in a hand basket in this year considering high interest rates, a probable recession, job losses and all that?

But there’s always a bad thing waiting to happen. Too many times it looked like Vitalstatistix was going to be right, for those of you who have read Asterix (and if you haven’t, it’s an awesome comic book set, where the character called Vitalstatistix was always worried that the sky would fall on his head)

There was Brexit, where the British vote to get out of the Eurozone. many eons before they actually did. It caused a flutter in markets, but no one now remembers. There was a volcano in Iceland that erupted and caused air traffic to shut down in Europe for a week. There was a worldwide outbreak of a hugely contagious Covid, which even locked the world down for months and in some cases, years. All of these things actually happened, and markets seem to have not cared. It’s the nature of the game to worry - and the sky never falls on Vitalstatistix’s head either.

So let’s do this: What’s going to take the market up, even in the near term? Here’s three triggers for markets to change:

One thing different now is that we have relatively high inflation in the west and thus, higher interest rates there, a phenomenon that’s only new in the last 15 years. Markets in the US saw rates above 9% for most of the 1980s, and after a recession in 1982, went on to make multi-year highs in subsequent years.

That’s because even in high interest, high inflation times, we will see good businesses make great profits. For some, their competition will just die. Think of it: when money was relatively cheap, you have to compete with someone else who can raise gobs of cash, hire away your best people for ludicrously high salaries, pay your customers to transition to them instead, and hurt margins for the whole industry because they are able to raise more money to pay for their losses. In a higher interest rate regime, money isn’t free anymore, so these pay-to-play companies will die, and those with an actual business model will take over their market share.

Even businesses that take on large amounts of debt might win, simply because they can now get into areas where their competition cannot, simply because the competition can’t raise money, equity or debt, to service new markets.

High rates are not bad, rising rates are. When there is a stability in rates, even if it’s high, markets will find their winners. And then, even if inflation has been high in the west, the base-effect of higher crude prices in the rest of the year will ensure that relatively speaking, inflation numbers will see some correction in 2023.

Another trigger comes from liquidity. Foreign investors have continued to be net sellers for the last 16 months, taking out over 190,000 cr. (usually they invest about half that much per year). If there’s less jitters about a further rise in rates, we will see money stop flow out. That itself is enough to allow the large domestic investments (through mutual funds) to let stock markets correct somewhat.

The last trigger we see is from actual earnings. Already, the Nifty 50 companies have grown their net profits by 19% in the December quarter. This is one of the best quarters that we have seen in the last decade, adjusting for outliers in the one-time hit and recovery due to Covid. For a Nifty that went up only 3% in the last year, this is a good sign.

If earnings continue to grow at this pace in Q4 as well, then at Nifty’s current value we pay less for Rs. 1 of earnings than earlier. Put another way, we get more net profit for every rupee we have invested in the market.

To summarize the three triggers:

Interest rates will stabilise. Winners will emerge from a high-but-stable-rate regime.
Foreign institutions will tire of their selling, allowing markets some space.
Earnings of Indian companies are rising and that makes valuations better.

None of this happens tomorrow. No one cares about a slow change, but it’s the only kind of change that matters in the long run. Our job is to look towards the next decade for what will turn out to be great opportunities. But we’d like to address the elephant in the room: Why aren’t markets giving even as much returns in the last one year as fixed deposits?

When they start to look like that, they often give way better returns in subsequent years. Markets are often the best to participate in when everyone’s bearish.

Addressing our inner Vitalstatistix,

Deepak

The markets that need a spark

deepakshenoy@capitalmind.in (Deepak Shenoy) — Tue, 14 Feb 2023 11:12:13 GMT

Firstly, thanks for visiting the town hall in January! We really appreciate your feedback and presence, and look forward to a better 2023.

Our performance for the last three years:

We’ve had a rough season on portfolio performance in the last year. In the longer term, while Momentum has had an excellent run, Surge India and the Market Index have had some setbacks. We have realigned Surge India as a portfolio recently, and Market Index is seeing some small reprieve with the Nasdaq coming back up, and we hope to see some good numbers going forward.

On the earnings front, Surge India has started reasonably (though some results are yet to come). Revenues, measured by the median, are up 15% year on year in the quarter, which is comparable to the Nifty’s 19.6%. The more impressive number is the net profit after tax, which is up 17.6% compared to the Nifty’s 12.2% so far (median stock performance). Now this is still a little early to say, but it means two things:

Nifty’s growth is impressive - a nearly 20% revenue growth and a 12% profit growth is good. It does mean, though, that margins are getting hit (as profit growth is slower than revenue growth)
Surge India seems to be doing better on margins - with a much higher margin profile than the Nifty and than revenue growth too.

This is partly due to some extreme outliers on both ends. We had a phenomenal quarter in LIC’s numbers. There, it’s almost like they realize every quarter that there’s some profit that they should be giving to shareholders, and find the numbers to deliver. The stock price has not yet realized it, but this appears to be a company that has a profit pool of between 25,000 cr. and 30,000 cr. per year, valued at 400,000 cr. It’s increasing market share and the recent budget changes are unlikely to hurt it all that much as they serve a relatively lower income population. Yet, we believe that the market will take a year or more to realize this potential - simply because that’s how markets are. They will refuse to believe until they have no choice.

On the flip side we have had some stinkers from the likes of Garware Fibres and Balkrishna Industries, mostly on the back of a slowing Europe and a recession-headed North America. We’ve seen these stocks give us some amazing returns in the last few years, but if the situation looks like they’ll suffer a major valuation correction for an extended period of time, we’ll make our calls to reduce or sell.

That’s one thing we strongly believe at Capitalmind: Stocks don’t love you back. I could extol the virtues of either of these stocks. Garware did an incredible thing - gave up 10% of the shares of the company owned by an employee welfare trust so that all shareholders would see a 11% jump in earnings per share for the exact same earnings. Very few people do this (Escorts is another that’s doing it right now). The stock too, has served us well - it’s gone from a boring 900 to 3,000 in less than three years. But this doesn’t mean we stick with it forever.

There are headwinds for the company. Valuations are richer than they used to be, at 35 times earnings. The situation in Europe isn’t going to recover soon, and when it does it will be slow. The price of the stock too has shown some damage too, falling around 20% from its recent peak. There are better players that fit the Surge India philosophy.

Loyalty is for friendships and relationships, but companies that you invest in, that’s a business. You don’t fall in love with your inventory, no matter how much money they’ve made you. And the important part of selling a stock when you aren’t attached to it: you can buy it back just as impassionately, even at a higher price, when the stock shows promise again. We’ve had great exits recently - from BSE and Indian Hotels - and if the businesses start to look good again, we’ll be back.

Of Budgets, Infrastructure and the Macro

The budget has been good in the sense that there wasn’t something insanely bad in there. We have sent a note earlier on the stuff that actually matters to you (read here for more) but in general, events like the budget are no longer as important as they used to be. The government often changes its financial stance at other times in the year, and in reality, government spending is less a function of stock market related earnings compared to the past.

But one thing does stand out: the government is serious about infrastructure upgrades, and domestic manufacturing to substitute imports. The Vande Bharat train project for example, isn’t something spectacular if you’ve travelled in trains abroad. It’s a nice train, and very nice if you compare it to the zamaana-old trains we used to travel in, but it’s hardly earth shattering for its interiors. The bigger deal is that it’s manufactured nearly entirely in India, and that reduces our need to import the locomotive or engine. Import substitution is happening and at a rapid scale - another 400 trains will come, in the next three years, to augment the ten that currently run.

India is one of the only countries that CAN replace imports meaningfully. We have a large domestic population worth serving, and we’re slowly getting richer too.The number of taxpayers showing incomes of Rs. 10 lakh or more (top bracket) have gone up from 30 lakh people in 2016 to 81 lakh in 2021. Serving this population has largely been from imports - big brand name garments or shoes, electronics, accessories, toys etc. But as you get more homegrown startups to address them (even if foreign capital funded) the local economy develops a lot more. As this happens, our markets which have seen so much domestic capital enter as well into public markets, should see strong earnings and thus, returns in the longer term.

None of this will happen in a year. If you build the roads, the railways and the infrastructure, they will come but they’ll still take time. The winners of tomorrow may just not be the winners of yesterday, especially when there’s a major change in the landscape. It’s dangerous to be “married” to a stock precisely because of this: markets change, and so must we.

The story you cannot avoid

You can’t have a stock market newsletter without mentioning Adani nowadays. We said in the town hall that nearly all of the 7% growth in market cap of all Indian stocks last year came from the Adani group. We were uncomfortable with most of the stocks - up and down in circuits isn’t good for the momentum portfolio, and Surge India balked at the debt levels. Now, this “avoiding” the group almost seems like a good thing, in just a month.

The market index is exposed as the Nifty and Next 50 have some holdings in these stocks, but a passive portfolio shouldn’t be second-guessed. Our policy is not to love or hate any stock, but to work with the merits. In this case, the events that have transpired in the stock market have now started to impact the business itself, with partners stalling joint ventures and debt costs for refinancing spiralling up. Markets are “reflexive”, in that fundamentals impact stock prices and then, stock prices impact fundamentals. The spiral has an upward bounty when things go right, but a dangerous feedback look when they don’t. Regardless, this has very little impact on the banking system, the stock market or the overall economy, so it hasn’t changed our outlook on a resurgent India.

Much as the investing goes on, this letter has to come to an end. I’ll end with a “sher” (urdu couplet) by Ahmad Faraz, that I heard in a lovely video about “Train 18” by Sudhanshu Mani:

shikva-e-zulmat-e-shab se to kahin behtar tha

apne hisse ki koi shama jalaate jaate

(Shikva = complain, zulmat-e-shab = the tyranny of darkness, shama = fire)

Better than to complain about the pain of darkness,

You could just choose to light your portion of fire before you left

To finding some of that spark,

Deepak

Back to All Time Highs

deepakshenoy@capitalmind.in (Deepak Shenoy) — Fri, 09 Dec 2022 08:54:41 GMT

What a rebound the markets have seen. The Nifty has run away considerably in the last few months, with a double digit return on a one year basis. Capitalmind’s active portfolios have lagged in the one year time frame, but we’ve managed a post-fee outperformance in the 2 and 3 year durations. Momentum continues to perform and long term multicap is running decently too.

The market is back to all time highs, and this time it almost seems distasteful. The rally in stocks does not excite most participants because of the core feeling that the world is going into a recession. The inflation in the US is at 8.5%, and the Fed is relentlessly increasing rates. The war in Ukraine isn’t ending. And then there’s a strange price-cap on Russian oil from December 5, which is supposed to tell Russia to price oil below $60, or else they won’t buy, but they aren’t buying that much anyhow, and don’t necessarily want to tell India and China to not buy either. No one knows how this will pan out, so let’s just not invest, we think.

But Indian markets don’t seem to care. It’s the second best performing market of the year, in local currency, only second to Indonesia among the economies of some scale. This move to an all-time-high hasn’t had that much enthusiasm among retail investors, but the price speaks for itself usually. Markets climb a wall of worry.

In this context, India is an outlier, for some clear reasons:

We get inflation. Because we’ve had it all these years. We know what it feels like, to see prices go up, to see wages go up. 7% is normal. And that’s why we handle it better without doing silly things like the government paying people money to deal with inflation, which is the equivalent of trying to put out a fire using…petrol.
Nipping speculative excesses: Too many retail participants playing on margin? Increase margins. Banks lending too much? Force them to take higher provisions. Crypto madness? Cut it down. We might suffer from being a little behind but at a time when the excesses are hurting others, we seem to shine.
The alternatives seem worse: For global investors, among the large emerging economies, Russia’s out, and so’s China now with their hatred of private profit. India remains a clearly attractive market, that seems to deserve more than the 1% of global flows that it currently gets.
The maha-trends: UPI has taken India by storm, with over 11x the volumes of credit card transactions. And it’s free for nearly everyone, and yet, paid for by higher float income. There’s more on the way: ONDC, an open architecture for e-commerce and logistics, will create business opportunities and threaten monopolies. The concept of a dedicated freight corridor (DFC) which launches in 2023 is likely to increase volumes of train based goods shipments multifold, while cutting costs in half. The electric vehicle move, which will eventually reduce the crude-oil import bill that forms so much of our imports - in fact, cut the crude bill to half, and India will have a current account surplus! The account aggregator ecosystem, already launched, which moves India from a gate-based one time credit assessment for loans, to a more flow-based continuous monitoring. The impact for credit is massive. The trends are huge. And we’ll elaborate in future posts. But we’ve been so behind the west that each of these maha-trends adds massively to GDP.
Domestic consumption and import substitution: India’s relatively a large economy for its own self. And even if the world was hurting, our own market is starting to emerge as a useful destination to sell. Recognizing this, the government has moved away from export-led incentives, to production-linked incentives, meaning: sell where you like, just make it here.
That crazy financialization:India’s moving out of the real estate and gold markets as primary goals for savings and moving to investing in financial assets instead. From bonds to mutual funds to insurance and then to stocks, the new India seems to love the financial bazaar much more. The power of UPI and digitization of KYC, demat accounts and depositories makes it that much easier - and then, even easier to borrow and get access to credit.
Solid government finances: While the west was printing money like it was going out of fashion and thus running large government deficits, India controlled spending and increased taxes. This has resulted in a government balance sheet that can afford to spur the economy now, when things are down elsewhere. That money is going toward infrastructure - roads, defence, rail and promoting local manufacturing.

This is of course the narrative. And we are the underdog. We have weak institutions. We have difficult cultural imbalances. We fight over things like which language we should speak. And yet, we have this massive opportunity that makes us look like a one-eyed-man in the kingdom of the blind. It’s ours to lose, I think.

However, everyone’s in on this story - that India will do well. It’s becoming visible to the rest of the world, too. There’s articles about it - like this Financial Times piece. This is a key risk, because being the underdog is fine, but the overconfidence can quickly set in when everyone is betting on you instead. To demonstrate, here’s a clip from the film “Never Back Down”. In a no-holds-barred fight, one of the fighters does a whole bunch of stunts: cartwheels, backflips and one-arm handstands, to impress the crowd. And then he cartwheels over to his opponent, who knocks him out with a single punch. The reason it’s impressive isn’t the single punch. It’s the showing off and the “karma” that’s the retribution for it. We should be careful that India doesn’t get caught up in the hubris.

We’re embracing it, though. Our long-term multicap portfolio will now be called “Surge India” - a bet on the maha-trends we believe will shape India’s future. In effect, nearly all companies will be impacted positively (except those that refuse to change). 80% of the portfolio will cater to the large trends we see, and with the remaining, we’ll tackle shorter term trends and special situations.

We’ve always liked prices to trend upwards, no matter what portfolio we’re in. So you might find that we buy even more when prices go up, because that’s what stocks are supposed to do: go up. Much about company fundamentals come after prices respond positively, primarily because there are enough people who know about what’s coming even before anyone else does. Not every price rise is reliable, so in Surge India, while identifying longer term trends, we look at price trends to help discover potential opportunities in the spaces we like. All things considered, a stock in an uptrend with volume and the right amount of liquidity will get itself in.

There are many ways to participate in markets. Some people focus entirely on “return on equity”, regardless of the underlying price of the stocks, a strategy that has indeed given great returns in a time when interest rates have been benign and supportive of higher valuations. Some others may focus entirely on growth companies, where the current valuations are supported by massive increases in revenues over time. And others may focus on value, where the stocks are at very low prices relative to revenues or earnings. Each of these strategies has made excellent returns at different times; currently, looking at public sector banks and companies rise to new all time highs every, it’s the time for value to make its presence felt after many years.

Our momentum strategy narrows down on price and volume, and even at Surge India we look carefully at the underlying price trend to discover, analyze and invest in stocks. Price as criteria isn’t any of value, growth or “quality”, but sometimes gives you a leading indicator to understand where any or all of these are emerging. While it may sound like high prices are dangerous times to invest in, the data simply doesn’t agree.

Anoop writes about investing at “high” prices. Or, indeed, what happens if you don’t. The simple answer: Nothing great, compared to just doing it anyhow.

The 1 year return after investing - a relatively short time, we know - is roughly the same if you invest or not, on any day that’s close to an all-time-high in the Nifty. In fact, the distribution of returns is also roughly the same.

If there is no real advantage in “avoiding” the times when markets peak, then a good time to invest is…anytime. In fact, on a five year basis, the Nifty is almost never “negative” in returns if you just invest regularly:

What we find is that the times when everyone is scared to invest is usually a good time to invest. This seems to be one of those times.

Breaking the rules: We have an interesting story that we added recently because we think it’s a jewel hiding in plain sight. LIC, that behemoth insurer, which listed in 2022, has only now discovered that there is such a thing called shareholder value. And they’ve found that if all they do is just follow the accounting rules that others follow - like taking profits that rightfully belong to shareholders which they have not taken - they can be one of the more profitable companies in India.

And they were the most profitable listed company in Q2, having found that they had the right to take nearly Rs. 5,000 cr. per quarter since January 2022, but for reasons unknown to humankind, they had not done so. Three quarters at one shot, and the Rs. 15,000 cr.+ profit was the biggest of any listed company in India. (Even the regular 5,000 cr. per quarter will keep it in the top 10) We made a podcast on it, and you’ll find it in your Surge India portfolio too.

Here’s wishing you all a very Happy and Prosperous 2023 in advance. We hope the Capitalmind Portfolios will go back to giving great returns even in the short term, as much as we’ve done in the longer term. We will start the year with the Town Hall on 21st January. I look forward to some great discussion, this time in-person! We will email the details by early next week.

I hope all of you prosper and find joy in the year ahead!

Cheeringly,

Deepak

India at the end-game of the world’s greatest macro-experiment

deepakshenoy@capitalmind.in (Deepak Shenoy) — Mon, 10 Oct 2022 10:03:39 GMT

The rough end of the markets in September means we’re doing -3% for the month on the Nifty (Capitalmind active portfolios have done marginally better, though still negative). Our own portfolios have been this way:

Multicap has “outperformed” but a 0.8% absolute return in a year isn’t that great, honestly. Momentum and Market Index have had their rough seasons, as has the Nifty. We’ve had a lousy one year, for sure, and we are long-only so we don’t benefit from the markets falling. Longer term, we’ve delivered better returns but the true test will be to make it through this period and when equity returns get better, outperform in the short term as well.

We’re fund managers, so we’re optimists by nature. We have a “bullish” bias almost all the time. But if you ask me honestly, where would I have my money invested: my feeling more than any other time before would be - Indian equities. (And I do, personally in the PMS) I fight my biases all the time, but the data seems too interestingly bullish to ignore, at least in the 5+ year horizon from here..

The Nifty is in fact the second best index (in local currency) compared to the UK FTSE, US S&P 500, Nasdaq 100, German DAX, Japanese Nikkei, or the Korean, Singapore or Hong Kong indexes. Only Indonesia does better:

And then, the USDINR, which has now risen to Rs. 82, is also relatively better than even the Japanese, British and European currencies. What’s really happened? Does it matter to our stocks and market?

Why India seems to be better positioned

The answer is in two specific things:

The world’s seeing inflation because they gave their people too much money for free. They’re trying to reverse that by increasing interest rates and engineering recessions, but their economies are too fragile to withstand both high rates and extremely loose government balance sheets that need to keep borrowing money like crazy. Normally, China would benefit but it has similar problems and politics is overruling economics, so they arrest business leaders and lock down the entire country for months. The result: a massive oncoming recession and a weak west.
India’s seen all this before, in the last two decades. So we don’t give (too much) free money. We don’t have overloaded government balance sheets (we actually raised taxes!) and we raised our interest rates much in advance of oncoming inflation. India’s just relatively better because we healed from our scars, and everyone else is just about getting beaten up.

India has great things going for it - and we’ll have more details for you over time, but here’s the gist:

Digital infrastructure: UPI, ONDC, TREDs, Account aggregators and such, along with the brilliant telecom networks we have, are awesome public digital infrastructure that make it easy to pay, get credit, ease logistics and reduce bad loans. What will get built on top of this will change India, and perhaps even the world.
Physical infrastructure: Apart from Bangalore, there are better roads everywhere. There’s a dedicated freight corridor that will change rail transport massively.
World trends: Electric vehicles will build energy independence, and transport efficiency. Hydrogen and nuclear will redraw how energy is created.
Going domestic: We don’t have to focus on exports. Our local economy is big enough to build for, to substitute imports and to build huge enterprises.
Financialization: As we realize this, domestic savings are moving to financial assets - stocks, bonds and the like. That has a huge scope for future growth.

If you combine the weaker situation in other countries with a relatively stable India, and with potential long term gains from a stronger infrastructure, it might just be the a great decade forward for India. We’re looking at companies in these spaces, and nearly 75% of the Long Term Multicap portfolio is related to them, and we’ll track these “maha” trends and work with participating in the larger story.

What’s happening elsewhere?

Meanwhile the situation in the world gets crazy. Interest rates rose rapidly in the US, Europe and the UK. So much that there has been panic at various levels. In the UK, long term rates hit 5%. That forced the Bank of England to jump in and buy bonds, exactly when they said they’ll sell bonds instead. Just to rescue pension funds that, apparently, found it appropriate to leverage themselves and could go bust with the higher rates. We’ll write more about this, but skeletons come out of financial closets only when interest rates are rising.

The war in Ukraine continues. Europe’s struggling on the energy front, as winter approaches. The Chinese situation is almost unknown - nothing seems to come out or go in, as they’ve enforced strong lockdowns and travel restrictions. Demand worldwide has slowed, which reflects in lower crude prices, wheat prices, palm oil prices and such. The world economy will slow down, and that has repercussions on all markets, including ours.

Our IT exporters might still do well, because they handle critical functions at relatively low costs. (Always, the highest cost non-critical items are cut first in a recession) But demand of all other things we export - chemicals, tyres, fertilizers etc. - will be hit as well. The solace, though, is that most of our companies have reduced their leverage and have the ability to live through a bad patch, and even thrive as some of their competition struggles.

It will pay now to stick with resilient companies and build a base for the longer term.

When do our stocks actually recover?

For all our “being better”, Indian markets are actually quite negative compared to fixed deposit returns in a one year time frame. Our performance too sucks in that one-year time frame, and we’re working hard to build portfolios that can do much better going forward. Times change, data changes and investing strategies must adapt as well.

In the end, the question is always: all this is ok, when will our portfolios recover? My answer to this is - I think we still have a rough year ahead in terms of market falls, but in a couple years, we should be back on a growth trajectory. Why do I say this?

Markets are slaves of liquidity. They don’t reflect fundamentals all the time. India did very well relative to the rest of the world in 2008, but still, our markets fell 60% when the world fell. (Our GDP grew 5%, everyone else was in negative territory). Markets in India are slightly less dependent on liquidity from abroad now, but if there is a world panic situation, we’ll still see dramatic moves on the downside. (And possibly, equally dramatic returns on the upside)

I’m positive about long term liquidity - foreign investors will do very well to invest in India compared to other countries simply because of our superior macro situation, our lower inflation, and our large domestic economy. (We aren’t only export focused) In the short term, however, some crazy pension fund in the UK will have overleveraged itself, which causes it to sell whatever it owns, and some Swiss bank will go bust, and some American hedge fund will own all of the above and sell whatever Indian stocks it owns just to compensate. That will hurt our markets in the short term.

Our job is to look long term, but we can’t ignore the short term - even a single year of low performance creates jitters, as we have noticed recently. We can’t stop the forces that shape markets, and we can’t even predict them. But we can put a process in place that says: this is how we will react when this happens, if this happens. This is what we do every day at Capitalmind, while keeping our focus on the long term where the real magic happens. Opportunities will come, and appear rapidly, in a time of crisis.

If you look at the period between 2019 and 2024, nominal growth of the economy should be around 12% on average. That would mean an absolute return of 76% is what you should get just by indexes alone. This translates to Nifty levels of 21,400. I’m not predicting that this is where we will be, but in a five year period, we should inch towards that number. From where we are today, that’s still only 13% a year for the next two years.. At Capitalmind we do want to beat this, so we’re looking for stocks in our portfolios, where growth can be much higher than 13% a year!

I’ll leave you with this. The world will be more depressing in the next few months. Markets will be shuttling between temporary panic and temporary euphoria. You’ll feel like the FD is a better place to be. But this is an amazing, solid place to build stock market positions for the next five years. If you don’t need the money in the next half-decade, now is the best time to stay invested or keep to your investing plan. (I won’t say “add more” only because I cringe at over-selling. I’m personally adding where I can, and our company now has half its net worth invested in the Capitalmind PMS)

Dussehra is here, already. It’s time for the good in us to triumph over all the bad. All of us at Capitalmind wish you all the very best for the holiday season ahead, and that the festive times will bring cheer to your wealth as well!

Optimistically,

Deepak