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<\/a><\/p>\nNow, 14% is nothing. Even in really good years, it’s normal for markets to fall 20% at some point.<\/p>\n
What makes this phase painful is that Indian markets have now gone nowhere for more than two years. Most investors came in after the pandemic, saw some really, really good returns from 2020 to 2024, and have never lived through a sideways market. If you’ve been around, this is a non-event; there have been several stretches of five years or more when Indian markets went nowhere. But if you’re newer, your one- and two-year SIPs are in the red, and your three-year SIP has barely broken even. To you, this is as good as a first bear market, even if it’s a very shallow one. To make things worse, we also seem to be entering a dangerous phase in history.<\/p>\n I keep thinking about a Shakespeare line from The Tempest. I haven’t read Shakespeare; I saw it on Twitter or somewhere: “Hell is empty, and all the devils are here.”<\/p>\n Look at the world through any lens you like, politically, geopolitically, economically, financially, militarily, technologically, climatically, and all you see is instability. It’s as if everybody, everywhere, decided at the same moment that the existing state of affairs was untenable, and now they’re all messing around and finding out.<\/p>\n Start with geopolitics. The war in Ukraine keeps getting worse. Ukraine has been hitting Russian refineries to make the war expensive, and since the summer, the two have been hitting each other’s ports and ships in the Black Sea<\/a>, right in the middle of the harvest. Between them, they account for more than a quarter of the world’s wheat exports, and the FAO’s food price index is at its highest since 2022. Europe, meanwhile, has cost-of-living protests<\/a> from France to Belgium.<\/p>\n Then there’s energy. Thanks to the shambolic war between the US, Israel and Iran, Brent crude shot up from about $71 to $138, and as I write this, it’s still around $115. The chart of ships passing through the Strait of Hormuz looks like that of a patient whose heart has stopped beating: from about 78 ships a day before the war to a handful. The single reason the mother of all oil shocks didn’t materialise is that China put a lid on oil prices by cutting its own imports by more than 40%. It reminds me of how China put a floor under the global economy after the 2008 financial crisis, when it unleashed the mother of all stimulus packages.<\/p>\n After the global financial crisis, nobody cared about bond markets, because interest rates were at zero and bond yields were at zero too, for a brief while even negative. Now bond markets are front and center again, with yields spiking across the developed world and emerging markets alike. The US 10-year closed at 5.31% on 5 October, its highest since 2002. Britain’s 30-year crossed 6% for the first time since 1998. French yields crossed 5%<\/a>, and the irony in all of this is that France is now paying more to borrow than Greece<\/a>. I didn’t think I’d live to see that. Remember, during the euro crisis, the roles were reversed: France was part of the core, and Greece was the country on the periphery in trouble. Now France looks like the basket case.<\/p>\n Inflation is starting to rise everywhere, including India. In September, wholesale inflation hit 11.4%, and retail inflation was 5.5%<\/a>, with food prices up 7.7%. And we’re staring at a severe climate shock in the form of El Ni\u00f1o. NOAA reckons there’s about a 70% chance<\/a> it’ll be the strongest in recorded history, and people are throwing every superlative they can find at it: “super El Ni\u00f1o”, “record-shattering”, “historic”. This year’s monsoon was already 13% below normal<\/a>, so the odds of a food inflation spike are on the higher side.<\/p>\n Then there’s the bigger picture. In a couple of years, the US went from being the global hegemon that was supposed to guarantee stability to one that promises nothing but instability. Every day, we wake up to some “aaj kuch tufaani karte hain”<\/em> moment from Washington. The whole pretense of what was euphemistically called the liberal international order is gone. As Mark Carney said at Davos in January<\/a>, “we are in the midst of a rupture, not a transition.” It’s each country unto itself now. The age of enlightened self-interest, the age of sovereignty, the age of state capitalism, the age of self-sufficiency.<\/p>\n Choke points are being weaponized. The Houthis have weaponized the Bab el-Mandeb, and Iran the Strait of Hormuz. In hindsight, the Ever Given getting stuck in the Suez Canal seems quaint. And it’s not just the seas. China controls about 90% of the world’s rare earth refining, the stuff that goes into everything from EVs to fighter jets, and it has shown it won’t hesitate to use that as a weapon. In June, it cut off 10 US companies<\/a>, including America’s only operating rare earth mine. In July, it did the same to 14 European companies<\/a>.<\/p>\n Sudan is the poster child for “hell on earth”, with about 13 million people driven from their homes. And we all know the shambolic state of US politics, and of Trump himself.<\/p>\n Then there’s the biggest unknown of all: what AI will do to society. Maybe, as Arvind Narayanan and Sayash Kapoor argue, AI is a normal technology<\/a>, like every technological shift before it, one that kills a lot of jobs and creates a whole lot of new ones. Or maybe it’s the last invention we’ll ever make, and it ends in some kind of eschatological rapture. Remains to be seen.<\/p>\n I could keep going. I’m 100% sure I’ve missed several things. But this is the backdrop.<\/p>\n Geopolitics makes market experts say all sorts of dumb things. The mistake they make is connecting geopolitical events directly to stock prices and making proclamations that end up making astrologers look respectable. Yes, geopolitical events move stock prices. But it’s infinitely more complex than the headline. There are second, third and fourth-order effects that are very hard to predict, and they’re different for every kind of shock, be it an oil shock, a war or a natural disaster. No two geopolitical events are the same, so it’s very hard to make any general prediction about what they’ll do to markets. They come at you through oil, food, and all sorts of other input prices, through bond yields and interest rates, and so on and so forth.<\/p>\n This time, they’re reaching India through two big channels. One is the rupee, because foreign investors are pulling their money out. The other is commodity prices, oil above all, because we import roughly 90% of our oil.<\/p>\n Now, markets are good at swallowing all sorts of information. But when the shocks never stop, when geopolitical events keep mutating like a virus, and instability becomes the norm, investors demand a higher risk premium for owning shares. One way or the other, the markets have to price that uncertainty. Nobody panics and dumps everything; investors just pay a little less for the same earnings. And you see it in more volatility, lower returns while that repricing happens, and choppy, sideways markets. That’s what a time correction is, and that’s the sideways market I started with.<\/p>\n And I don’t think the shocks are stopping anytime soon. We seem to be entering an age of higher interest rates, higher inflation, and a world splitting into blocs. The phrase I have in my head for it is the age of discord.<\/p>\n Now, if some geopolitical experts were in the room as I write this, they’d slap the hell out of me. But I’ll say it anyway: India doesn’t have a whole lot of leverage in the world right now, though there’s some nuance to this<\/a>. Look at trade. Last August, Trump took the tariff on Indian goods to 50%, half of it as punishment for buying Russian oil. On 2 February, he cut it to 18%<\/a>. The price for placating Mr. Trump was us supposedly agreeing to stop buying Russian oil and to lower our trade barriers, so US companies could sell their products in India more easily. That’s a vivid example of leverage being used. And yes, we’ve been striking trade deals with the likes of Europe, so it’s not fair to say we have no leverage at all. But the US has an asymmetric advantage purely because it’s the US.<\/p>\n And as if all of this wasn’t bad enough, the rupee has been falling at a rate much higher than its average. Since the September 2024 peak, it has lost about 12% against the dollar, from \u20b983.6 to \u20b995.2. That’s about 6% a year, against an average of about 2.6% a year from 2001 to 2025, more than twice as fast.<\/p>\n And foreign investors have been selling Indian shares as if it’s the end of the world. Since October 2024, they have sold a net \u20b97.6 lakh crore ($85 billion) on the stock market, and \u20b93.5 lakh crore ($37 billion) of that since the war began. Even though they put \u20b91.9 lakh crore ($22 billion) into IPOs and other new issues, the net outflow is still \u20b95.7 lakh crore ($63 billion).<\/p>\n Whenever I talk to domestic fund houses or global allocators, the one thing I make a point of asking is their take on India. Right now, India isn’t even in global allocators’ consideration set. You don’t have to take my word for it. Akash Prakash of Amansa Capital wrote a piece in Business Standard<\/a> this week saying the same thing.<\/p>\n Why? Depends on who you ask. Some say it’s the falling rupee. Some say it’s because India doesn’t have an AI play, which doesn’t pass the smell test, since no country apart from the US and China really has one.<\/p>\n Then there’s tax. Taxes matter for investors, and if you speak to fund managers and allocators, you’ll hear that this is one big reason India isn’t an attractive market. India taxes the capital gains foreign investors make, 20% on short-term gains and 12.5% on long-term ones, plus surcharge and cess, and very few markets do this<\/a>. If you’re a global hedge fund buying shares in, let’s say, the US, the UK or Singapore, you don’t pay any tax on your gains there.<\/p>\n Why does this matter? The biggest allocators, like pension funds and university endowments, are tax-free entities in their home markets. So they can’t set the tax on their Indian gains off against anything at home, which means it’s a straight hit to their returns. It seems there has been some rethink in the government: in June, it made government bonds tax-free for foreign investors<\/a>. Shares still pay capital gains tax.<\/p>\n The other complicating factor is the bond market. Put yourself in the shoes of a global allocator. If you can get 5% risk-free by owning US Treasuries, why would you take Indian equity risk at a time when the rupee is falling, and then pay capital gains tax on top? All of that comes out of your returns, which makes Indian equities unattractive next to other markets and next to a safe asset like US Treasuries. It isn’t the reason, but it adds to everything we’ve discussed so far.<\/p>\n So who has absorbed all this selling? Domestic investors, mostly mutual funds and insurance companies. They’ve pretty much absorbed all of the foreign selling and bought more on top of that. Since October 2024, domestic institutions have put in a net \u20b916 lakh crore ($181 billion), more than twice what foreign investors have sold.<\/p>\n But to make things a little depressing, zoom out and look at the last ten years, and the foreign inflow into Indian equities is zero. Actually, it’s negative, about \u20b91.4 lakh crore ($7 billion). At the September 2024 peak, foreigners were still \u20b94.4 lakh crore ($57 billion) ahead over those ten years; the last two years wiped all of it out. Sorry, I told you it was depressing.<\/p>\n
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\n<\/a>This phase hurts because it’s a time correction more than a price correction.<\/p>\nHell is empty<\/h2>\n
<\/a><\/p>\nWhat does any of this have to do with your portfolio?<\/h2>\n
The age of discord<\/h2>\n
<\/a><\/p>\n