Slowly, Then All at Once

For the folks who like TLDR:

• US-Iran war MOU signed. Formal peace deal on June 19th. Hormuz reopens after.
• Govt opened the FPI floodgates on G-Secs. $25-30bn potential inflows. Rupee expected to stabilise.
• Surge up 5.3% in May vs Nifty 50 TRI at -1.7%. Mid & small-cap tilt is working.
• Momentum up 5.3% in May. Back to outperforming on 1M, 3M, 6M and 1Y.
• Q1FY27 will be weak. Market knows it, will look through it. Q2 commentary is what matters.
• Policy, peace deal, earnings & valuations, all slowly aligning. Best time to be patient & positioned.

Over the last few months, there was a gloom & doom scenario for Indian markets.

• India's growth story at risk
• Constant FIIs selling,
• INR is falling,
• No AI play,
• IT sector is under stress & fear of job cuts,
• Impact on high ticket size consumption,
• Crude impact & rising inflation

& a few more.

You know what's funny about this list? Every single point on it is still somewhat true. And yet, the market is up. That's the thing about extremes, the last bit of bad news rarely moves the needle the way you expect it to.

Things usually don't stay at extremes for long. Sanity will emerge, & it is a law of nature. Historically, India as a country has done the best in terms of policy changes when things were pushed to extremes. Be it in 1991 economic liberation, 2013 taper tantrum, 2020 Covid & the ongoing currency crisis (if we may call it so)

Last week, the Govt stepped in with two major announcements. Tax Exemption on G-Secs for FPIs/FIIs and FCNR(B) Swap Window opened for NRIs.

Why are these important?

FPIs are now fully exempt from tax on G-sec interest & capital gains. Previously, they were paying 20% withholding & up to 20% capital gains tax. The market responded immediately ~9k cr came in just in 4 days, bigger than Apr & May combined.

On the RBI side, they will bear the full FX hedging cost for banks raising 3-5 year FCNR(B) deposits till Sep 30th. FCNR inflows had quietly collapsed from ~$7bn in FY25 to just $946mn in FY26. This fixes that. The last time something similar was done was Rajan's 2013 scheme during the taper tantrum. They targeted $10bn, raised $30bn.

Long story short, this time also they are expecting to bring at least $30-40 Bn into India, stabilise the rupee & bring back the confidence for FIIs.

However, the real trigger would have been to extend these tax reforms for FIIs to other asset classes as well, including equities (which may be the key concern for FIIs). That conversation hasn't happened yet. But this is a good start.

Second, the peace deal is signed (as of June 15th, 1:40 PM. The time stamp here is very important, knowing the neural structure imbalance of DJT at the white house. But for now, it is indeed a good announcement.

As per the deal structure, the signing will happen on June 19th. Iran has 30 days under the MOU to clear the mines it deployed. The pace of mine clearing will set the timeline for everything that follows. Insurance recertification will take another couple of weeks from then. So, technically speaking, only once the traffic in the Strait of Hormuz is resumed to its Jan 2026 highs can we say that war is complete.

The markets however, have already moved. Brent crude fell more than 4.5% to $80 per barrel on Sunday, its lowest level since before the war began.

Another positive point for the markets will be that, even though Q1FY27 is expected to be a weak quarter, the market will consider it like a one-off & start focusing more on commentary & the growth prospects of Q2.

Things are falling in place slowly. Govt taking necessary actions to curb INR fall, US-Iran peace deal, broad market earnings recovery in Q4 (the best EPS growth of NSE 500 in the last 6 quarters).

Just by connecting the dots, valuations & the kind of pessimism India had seen over the last year - I expect both sentiment & earnings to improve from here onwards for India Inc.

Coming to our strategies

Surge India:

Surge is up 5.3% in the month of May as compared to our primary benchmark at Nifty 50 TRI at -1.7% & our secondary benchmark Nifty500 Multicap 50:25:25 TRI at 0.6%.

Good month. But more than the number, what I want to highlight is why. Since October, we had been slowly building cash & tilting towards large caps, which helped us to cushion the fall in Jan, Feb & March. Then, in April, we made a deliberate call to shift more towards mid & small caps. That shift is what captured this upmove.

Top 5 sectors we are bullish on: Autos & auto ancillary (17%), Financial services (15.8%), Defence (13.6%), Power utilities (13.3%), Pharma (11%).

In the month of May, we predominantly added a basket of Pharma companies (where pharma as a sector is coming back on the growth track after 2 years). We added Granules, Torrent Pharma & Acutaas (87% of the revenue comes from the Pharma segment). Apart from this, we continue to hold Cohance as part of the special situation (expected turnaround from Q2FY27).

We continue to be bullish on Capital markets, Defence, Energy independence, consumption, etc.

The idea is to stay invested in sectors/themes that are showing strong earnings growth, where the market hasn't fully discounted it.

Pick the emerging winners in that space. Stay invested till they deliver on expected earnings, exit when they don’t. Repeat the process across market cycles.

Adaptive Momentum:

Momentum is up 5.3% in the month of May as compared to our benchmark at Nifty 50 TRI at -1.7%.

One important thing to notice is how momentum as a strategy has come back in the last couple of months. As we speak, Momentum is outperforming the benchmarks on 1M, 3M, 6M & 1Y. Good to see the factor coming back after 2 years of struggle.

For investors who have been with this strategy through the rough patch. This one is for you. You sat through it patiently. You didn't panic, you didn't exit. The thesis held. The factor is back (initial signs though).

Now, briefly on what we changed. Not to justify the past, but because you deserve to know what's different going forward.

• We were running on one recency-weighted momentum factor. Works beautifully in trending markets, turns fragile in sideways ones. We have now added two more flavours of momentum & a selection layer that picks which one to trust based on what the market is doing at any given time.
• The bar to get into the portfolio is now higher. Multiple signals have to agree before a stock gets in.
• Trend quality matters now, not just the trend. A stock climbing steadily gets more weight than one going up choppily. The path matters, not just the destination.
• We have built in staggered cash calls. Strategy scales down gradually as it faces losses instead of going all-in or all-out. A safety net for the curveballs nobody sees coming.

None of this is a guarantee. Momentum will have tough periods again, that's the nature of any factor. But the rough edges that made the last two years painful have been addressed. Early results are encouraging.

Staying Agile

Markets will surprise you. They always do. The investor who survives is not the one with the best prediction. It is the one who updates fastest when the prediction turns out to be wrong. Conviction is good. Stubbornness dressed up as conviction is dangerous.

Nobody gets it right every time. Not us, not anyone. What separates the ones who last from the ones who don't is not brilliance. It is the ability to stay agile when the situation changes.

We try to hold our views firmly enough to act, and loosely enough to let go. That balance is harder than it sounds. But it is the only way to stay in the game long enough for the good decisions to compound.

A line that has stayed with me:

"The art of life is a constant readjustment to our surroundings." - Kakuzo Okakura

Till next time,

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