India’s Small-Cap Mania Faces A Reality Check As Market Froth Peaks
In this week’s The Core Report: Weekend Edition, Govindraj Ethiraj speaks with Devina Mehra, Founder & CMD, First Global (PMS & Global funds), on why past cycles show that most small-cap rallies end in deep corrections, churn and forgotten failures — and why investors must resist FOMO-driven themes and euphoric narratives.
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Thank you so much for joining me on The Core Report. So, it is an auspicious day of stocks, because we have seen the markets hit fresh peaks and having recovered from the last peak seen in September 2024. So, September 2024 to November 2025, it has been a bit of a journey. So, as you look back, not just at the last 14 months or so, but even beyond that or before that, what do you see and what do the numbers, and when I say numbers, I mean the benchmark indices, tell us and what do they not tell us?
One thing which they will not tell you is that, I think for most of your viewers or listeners, their portfolio would not be touching all-time highs, because this has been an extremely narrow market. Especially up to August, it was very, very narrow. At that time, only about 10-12% of the stocks were outperforming the index, and I think something like 35% were down more than 50%.
So, I mean, in a normal market, you would expect about 40% plus of the stocks to outperform. When it becomes 20-25%, we say it is a narrow market. So, to have it as narrow as 10% is extremely narrow.
It has broadened a bit from there, but I think still only about half the stocks are down more than 20-25% from their all-time highs. So, I am sure the euphoria may not be as widespread as the indices show. The other thing to remember is that sentiment is a contraindicator, and this is not something I am saying, this has come out of research studies.
In whichever country the research study has been done, whether India, US, Portugal, Brazil, that when there is excess buoyancy in the markets, euphoria, I mean, like, if I go back, let's say, 15-17 months, not just the retail investors, I am talking ultra-HNIs, family offices were coming to me and saying, I don't have unrealistic expectations, I will be happy with 30% compounding. I said, that is an unrealistic expectation. But, I mean, last year it appeared the money was there for the taking.
I mean, people told me that, why do you say risk management first? Why do you say conservative management? We want to take high risk and get high return.
The only thing certain with high risk is high risk of losses. Nobody is guaranteeing high return. But the flip side to that is that when you are asking yourself, should I get out of the market, should I stop my SIP, is exactly when you should be invested.
Because the next period returns are above normal. I mean, that's the other side of the equation. And right now, if you look at the indices, there is no point looking at even at a crude PE level, looking at the index PE, because the composition of the index has changed so much.
I mean, you and I have been around long enough to remember a time when there were no banks in the Sensex and Nifty, and now that's the highest rate. At one point, these indices were full of PSUs, and then there came a time people forgot that PSUs were listed. So these are all cycles.
But if you look at the sectoral PEs, these are not at extremes. In many sectors, they are actually below even the last decade's average, and these are not on particularly great earnings. I see an uptick in earnings coming.
So between that and the fact that PEs are anyway not so stretched, I don't see grave danger in the market. So everybody understands the danger of being invested in the market, the risk of being rather invested in the market, but there's also a risk to not being invested. And we had done this data from the time Sensex started, which is 40-odd years.
So what if you missed out on the 10 best days? Now it seems like in 40 years, 10 days shouldn't matter, but actually two-thirds of your returns go. So instead of that Rs.100 becoming, let us say, Rs.85,000, you're now at Rs.27,000, Rs.28,000. If you miss out on the 30 best days, which is not even an average of one day a year, you miss out on 90% of the returns. So most of the time, unless you can foresee a really big crash, it pays to remain invested. But the other side of that is that you cannot buy and forget.
So don't think that I bought this stock last year at Rs.100, now it is Rs.65, I will wait till it is Rs.100. It will never come back to Rs.100, it may not come back to Rs.100. The market has absolutely zero interest at the price at which you bought. So you have to look at what is a good place to be invested today. Don't have loyalty and love towards your stocks.
So you talk about narrow markets, which means there are more stocks that have not fallen by the wayside or have fallen back. Why has that happened?
So if you look at last year, a lot of that euphoria was in small caps and micro caps. And even now the PEs are quite high for that cohort. And I was not in hindsight, but at that time I had said, look at the history of small caps.
The small cap index fell nearly 80% in 2008, 78% to be exact. It took 8 years before it came to that level. But that's also theoretical, because the index churns more than 20% every year. So 8 years later, it is a completely different index. And that's a characteristic of the euphoria in small caps in any cycle, that the stocks that do well in one cycle are not the same ones that come back. It's a whole different list.
In fact, even now I was looking at, I haven't quite collated the numbers, but I looked at it, that all the stocks that have gone from mid cap to large cap, small cap to mid cap and the other way around. And always the number of stocks falling down from large cap to mid cap and mid cap to small cap is more than the number of stocks that go up the list.
That is something I am sure not most people look at
And after I was at 2016, so 17, 18, again, there was this mad bull market in small caps. And again, there was a two thirds fall. So last year, many of these small cap managers who were saying, we've given 50% compounding for three years. I said, don't forget your school maths.
When you come down 80% and then you compound 50% for three years, you are still down more than 30%. So that's the nature of the beast. I mean, always remember.
I mean, again, you will remember this, that how many IPOs came in the 90s. There were two years when there were more than a thousand IPOs each. And today only about four, four and a half thousand stocks trade actively.
And the number of listings on the Indian market is, I think, more than three times that, if not even higher. So that means, you know, more than two thirds of the stocks ever listed are not even trading. They have essentially gone to zero.
So that's the, that is the flip side of all those who tell you buy and forget or long term investing. That's, you remember the successes, you forget about the failures.
And if I were to go deeper into that, the small cap phenomenon that you talked about, so would that be sector driven as well? I mean, were there some categories or types of companies or sectors which suffered or saw more damage than others?
Yeah, there would be. And there are always these themes that sort of catch the fancy and then need not even be only small cap. So I always say that, yeah, I say the easiest rule of thumb to see where there is excess and excessive froth in the market is to see where the NFOs are coming.
Whenever there is a cluster of NFOs on a particular theme, and this I'm not talking just two years, we've collated the data for 25, 30 years, that it is a pattern that when there is a cluster of thematic funds being launched, it is almost always close to the peak of that theme. I mean, whether you go back to the early 2000s, the pharma fund, the IT funds, and whether it was defence, PSU, small caps, more recently, it always comes at the peak of the cycle because it's easy to raise money then. By that time, every person on the street knows about it.
There's this FOMO feeling. My friends made this money in this theme and I didn't, so let me get in. So that always happens.
And what would have sustained? I mean, I'm trying to single out sectors again. So you mentioned defence, maybe flavour of the month, season, and it's maybe gone now. Maybe consumer tech is a flavour currently. We don't know right now. IPOs are mixed. So what are the sectors or themes that have sustained through this period?
So, I mean, I can tell you how we were positioned in our PMS. So since last year, we have been overweight pharma, healthcare, and auto, auto components. We've added a little bit of autos. This year, through 2025, slowly, I mean, our systems have started liking FMCG more and more.
So we are now overweight FMCG. We are not overweight banks, but we hold more banks than we used to, especially PSU banks. I'm always a very nervous investor in banks.
People tell me, I would say that's your takya kalam that you say. Direct lending is a very risky business. So I'm always a nervous investor.
You chose PSU banks over private banks.
Yes. I mean, we do have private banks also. As I said, we are not overweight.
Also, remember, banking as a sector, if you look at last five years, prior to 2025, it underperformed in four out of the five years. 2020, 21, 23, 24. So other than 22, it did not outperform in any year.
So it is also a cyclical thing. And it is the highest weight in the benchmark, so I can't ignore it completely. Then what we've added very lately has been some of the OMCs, basically in the energy sector.
I mean, we're not overweight, but that's the thing. And IT, we would be slightly overweight, nothing very spectacularly overweight. But what a system forces us to do is to look at things on both sides, you know, unloved sectors.
I'll give you an example, like capital goods industrial machinery. Our systems liked it in October 21, and we went overweight. Most other funds and investors discovered it two and a half years later when the stocks had already gone up two, three times.
And the reason nobody looked at it before that was, for a good 12 years prior to that, it was absolute dog sector. From 2009 to 21, it compounded some 2%. So everybody said, you know, we won't look at it.
So that's why we use what we call a human plus machine system. So the artificial intelligence machine learning system, it kind of forces you to look at the data and not be married to the stories in your head. Yeah, it is not a black box quant approach, that's why we say human plus machine, but it does the first filter.
And my pin-up, Daniel Kahneman says that a system will always outperform a human being in any game of judgement. Even if it is a relatively simplified system, the very fact that it acts without bias, it acts without noise, the randomness that human beings bring in, it will do a better job. Besides the fact that, of course, it can look at, you know, many more companies, many more factors within a company, and apply it on the same basis.
I mean, globally, for example, we look at over 20,000 stocks. You know, even if I have a thousand analysts, they're not going to look at everything in the same fashion. That's the part that only a system can do.
Can I come to global innovation?
Right, right.
Tell me about an instance where, let's say, your emotion was superseded by your machine.
So as I said that, you know, maybe you would not have looked at industrial machinery, capital goods, because it had been such a dark sector. But in systems, this is something called a broken leg analogy, that the system will be better at predicting whether someone will go for a concert. So you should overrule only if you know for certain that person has broken their leg and won't go.
So that's the whole point that, I mean, we apply a filter after that. Sometimes we will not go by what the system is saying, simply because, you know, not everything is captured by past data. But there has to be a good reason for that.
So, for example, I'll give you in 2020, there was this whole thing of that you can't go wrong buying consumer brands which make a lot of cash. And I actually did a half an hour programme on CNBC where I broke it down saying that these companies have underperformed for long periods in the past. But the point is that at the time that FMCG was the flavour of the season, nobody was looking at ITC because that was not performing.
So for our systems, early 2021, suddenly ITC became very high up on the charts and we saw no reason to overrule it. So next 2-3 years, it was among our top 5 performers. So that's the sort of thing it forces you to do.
I remember interviewing Aswath Damodaran in peak COVID on a virtual conversation when we were sitting in New York. And where I asked him after everything, I said, what's your favourite stock? And he said, ITC. And it was obviously in the boondocks at that time.
It must have been you invested jointly at the same time. Yeah, so early 2021, as I said. So that's what it forces you to do because human beings are creatures of the story.
We are very much married to the stories in our head. And without a system, you don't get over it. So that's the whole point.
So you talked about this interesting factor about 10 days in the last 40 years. And that if you ignore those 10 days, two-thirds of your return will go away. And you said if you make it 30 days, it's 90%.
How does that operationally play out? So most people now, for example, a lot of investors have only come in the last 5 years. If you look at the aggregate of investors.
So how would they even grasp something like this?
So the superpower in markets is not stock picking. It is realising that equity returns are lumpy. So like there was this book on Rakesh Jhunjunwala.
The authors did not catch the kind of significance of this. But for me, that whole point of that book was one line where Rakesh says that I made a lot of money in 89 to 92 in 2003 to 2007. And there was, I think, 2009 to 11.
And in between, there were even 5 years when I didn't make money. I said, now this is the superpower that you know that this is the nature of equity markets that you will get 10 years returns in 3 years. And, you know, if you look at that whole period also from 1994 to 2003, 9 year period Sensex gave 0 return.
It went up and then it came down. So it went up, I think, 5000 plus. Then again, it came down, I think, 40%.
And so 9 years, 0 returns. And then from 2003 to 2007, 6 times. So that is how...
Last 14 months, no returns.
Or for that matter, you know, you have this thing that, okay, Indian markets have compounded, whatever, depending on the measure you take, 15-16% over the years. But let alone year to year, decade to decade, the variation is so vast. So if you look at the 1980s decade, the compounding was 12%.
Next decade, 14%, then 17%, then 8.5%, 8.8%. So that was the thing. So if you put in 100 rupees in 1980, you would have 700 in 10 years. If it was 2010-11, in 10 years, you have only 230 rupees, which is about the same as the fixed deposit return.
So because you had that whole decade of below normal returns, that's why you had that bull run post-COVID. So even now, we are not at the extreme end. So that's why I'm saying that I don't see big risk of a crash.
As professional managers, what we do is that when we see any kind of question mark, then we would rather hedge. I mean, there are very few times we've made a cash call. COVID was one of them, and these are all both public calls on Twitter.
That March 2, 2020, we said something very strange and we went very risk-averse, but within three weeks, we made the call that time to be back in. But most of the other times, we prefer to buy insurance, so basically puts. So that helps us many times, like the day Russia-Ukraine war broke out, the market fell 5%, we fell 1.6%. At times, you will buy the insurance and it will go unused, as happened at election time last year that we were hedged, but the market went down for a very short period. But that also happens, but we always manage for risk first. So when I say that don't get out of the market, doesn't mean that you don't manage risk. So we always have stop losses, for instance, and we have many risk management measures.
In a way, you are also saying that, if I were to just look at the data that you shared so far, there is no individual professional investor, but a normal investor cannot do all of this.
Yes, so I have this thing that in my book also, I have a chapter that should you be a do-it-yourself investor. I said like, look at your performance data, your entire DP ins and outs, and how that has done, and consider yourself as fund manager number A, and then you compare against all the other five funds or PMS or whatever you are looking at, and how they have performed, and how much will you give to this fund manager. And if you just want to learn, or the other thing is, it's been my long-held belief that a lot of people invest in equities for entertainment, that otherwise what will we talk at parties, we can't just go and sit.
So if you want to do that, keep 10-20% for that. And whatever you're doing yourself also, I said the best thing you can do for your portfolio is to say that whenever you make an investment that I could be making a mistake, because no matter who you are, a large percentage of your investments are going to be mistakes. I mean, Warren Buffett sells out more than 50% of what he buys within six months, 85% within two years.
So no one has this magic wand that they know the future in advance. Because life is a game of skill and luck. It's always a game of probability.
Other than chess, there is no game of skill alone in this world.
So let me ask you about the IPO. And the reason I'm also asking, not because of IPOs and valuation, that's a separate discussion, is because that's where a lot of investors enter. And of course, either maybe benefit, but many of them do not.
And again, as you look back, we're seeing a phenomenal IPO boom right now. And it looks like it's going to get into or heading to December 2025, and maybe even split over to 2026. But it's at a scale, at the kinds of companies, we're seeing companies which have never made profits, which is a new thing in itself.
And investors are buying in. How do you see this from the vantage point of someone who's been in the market for so many decades? And you did touch upon this earlier as well.
Yeah, so I mean, very simply, if you are an investor and you want to behave sensibly, you should not be investing in IPOs when there is this kind of frenzy, when they are the flavour of the season. Because most IPOs will be overpriced in that kind of atmosphere. I mean, that's the mandate the investment banker has to maximise the price they get for the company.
And even if that is not the case, if it's a good company at a good price, then you won't get anything. So it just becomes a lottery game. And there was a similar frenzy exactly four years ago, October, November 21, which is when the first lot of many of these companies came in.
And most, yeah, underwater or at least not match the index or anywhere close to that. Some of them, you know, took three years. And if I go back to some of the, I remember one of the anchors said on one of these shows that Devina, if I put a gun to your head, which one will you buy?
And I said, gun to my head, none of these are worth buying. And he said, Oh, I mean, they might be overpriced just now, but another three to five years and the numbers will look different. I said, you have no visibility for three to five years, even for an existing company, let alone a new company.
And you look at some of them. I mean, Nykaa was just an example was one of those which had profits at that time. So there's something to compare.
I mean, the peak, all the peak numbers, the cash flows, margins, etc. were at that time. So the net profit margin was two and a half percent.
Then it is point nine percent now. And the reason I had, even that time I had said, and this is something that it actually dawned on me from about 20 plus years ago, Hindustan Unilever was planning to get into Atta. And I had spent time with Amul, even though it's not a listed company.
And our own analysis was that it was not a good move. But anyway, we asked Amul, what do you think? He said, we don't think, you know, this is going to be a good, profitable segment.
But if Lever proves otherwise, we'll also start our own. So what is that? So that's what I had said about, you know, companies which build a new segment, so to speak.
So unless there is a moat, and most of these companies have no moat in terms of technology. They are either platform companies or direct to consumer companies. So the only moat is how much money are you willing to spend for either some incentive for the buyer or to build that brand.
So that's, and money is now available. So as I said, that if you build a thing, you might, you'll attract others. And that's what happened.
Like in Nika's segment, there's been, Tatas have come in, Reliance has come in, everybody has come in. Because if you prove that this market exists, others will also come in. And as I said, I'm only giving it as an example, not that it's the worst of the lot or anything like that.
But those are the things that are, when everything is priced to perfection, then you are not factoring for any of these things. And also this offer for sale is the other dangerous thing. I mean, in principle, there's nothing wrong with offer for sale.
But offer for sale would make sense when the company doesn't need money. I mean, look at Swiggy. When they raised money a year ago, I think 4,000 odd crores were into the company, 6,000 odd crores was the offer for sale.
And now, within a year, they want 10,000 crores more. So, you know, this is, these are danger signs. They're saying, oh, we are in a competitive marketplace didn't you know that a year ago?
I mean, so either way, it's not a good endorsement of the management that either you didn't know what you were doing then or you're just raising money. So that, and also therefore, the IPO investor might say that so-and-so big names have invested, but you are providing an exit for them. And most of these IPOs were at 2, 3, 4, or lately even 8 times the last fundraise.
So that, that's the price at which you are entering. And so this is, I mean, you are, actually most retail investors are not even making any judgement that whether it's a business worth buying at this price. They think they are playing the lottery.
SEBI data also shows that most individual investors get in with, get out within a week or two of the listing. So this is, this ends badly. When it ends badly, you look for villains.
But I would say that the so-called common investor who is in it for the greed is always, is also to be blamed. If you read John Kenneth Galbraith's A Short History of Financial Euphoria, he said like, in the end, you look for villains. But, no one looks at the guy who was too greedy.
So that's the thing.
But there are a lot of institutions almost like, maybe, and also benefiting with the bops that they've been seeing.
Actually, I mean, there the thing is different. And SEBI data also doesn't show that the mutual funds flip out. It's the individuals who flip out.
But then, why do you have these big name anchor investors in what look like crazily priced IPOs? And I've been an investment banker, so I know this thing from the inside that unlike the retail segment of an IPO, either the anchor investor or in a QIP, the allotment is discretionary on the investment banker. So, if you look at some of these IPOs, while they're like, list of big name mutual funds, they are putting in a pittance.
They are putting in 0.0001% of their AUM. So, why are they doing it? It is the investment banker telling them that, I want your name to show to the retail investor.
And then, why are you doing it? Because, otherwise, the stated or unstated fact is that when there is an issue where you want an allotment, the investment banker favours you or does not favour you. And I can tell you, I have done QIPs in the 90s and up to the 2000s.
No, no, no. Citibank was earlier. The QIPs was in First Global.
So, we did very, very selective ones where I was convinced that the investor would make money. But then, what happens, especially during that tech boom, that you are doing an IPO as per the SEBI formula and by the time that allotment happens two weeks later, the price has doubled. And then, all your institutional investors are screaming at you, I was your friend, I am your long-term client, how could you not have given me enough allotment.
So, that is how it plays out in a coveted IPO. And the investors, you know, the viewers may not know this, that how much demand there is for an IPO is no indication of how it does thereafter. And the examples on both sides.
I mean, DLF, let alone companies which have gone bust like Reliance Power, if you look at DLF, the company went on, but that IPO price was not seen for decades. Or, on the other hand, Infosys was an undersubscribed IPO. Yes, exactly.
So, I mean, many people didn't know that. In fact, a journalist, I heard him say that maybe somebody's parent was lucky to get an allotment in the Infosys IPO and I called him up and I said, do you know it was undersubscribed? The money was made by the underwriters.
So, that's IPOs.
Right.
And let's talk about international. Sure. I mean, I always have looked at an international portfolio rather than… So, if you look around the world now and what's been happening in terms of, let's say, the AI boom or before that, let's say, the recession we've been seeing in companies like Netflix and so on, which you've spotted, tell us about how you divide your time and attention between what opportunities here and overseas.
I mean, see, now, a lot of the heavy lifting is done by the system. So, we, of course, have been global since 1999. So, we were not just the first Indian, we were the first Asian firm.
Yes. I mean, so we were, other than the Japanese, nobody had gone west. So, we became members of the London Stock Exchange in 1999 and a year later of the NSD, which is the U.S. broker-dealer association. dangers are building up in the U.S., I think. You know, that's the other thing. People think global means U.S. that a Nasdaq or S&P but that is not how the world is. I gave the example of 2003 to 2007. Now, that was one time when the U.S. and U.S. was not coming off a high. It was already in the doldrums post the tech crash and still it was a huge underperformer.
That whole period, the emerging market index went up three and a half, four times, India went up six times, Brazil went up ten times and the Nasdaq did not take out its 2000 high properly till 2015. So, that's the history everyone forgets. People think that U.S. always does well. A and B, that the whole world follows what the U.S. markets do. So, there the market, of course, has become very narrow, which all of us know and if you look at the various cuts, actually, the stocks doing besides this magnificent seven, the stocks doing really well are the ones with no revenue or no profits. So, and new technology, it sounds very sexy, everybody wants to chase that, but in new technology, it is always that which technology will succeed within that which player will succeed and the third layer of that is will they make return on capital.
So, if we go to the internet boom, it was that everybody in the world will use internet. So, you can't go wrong investing in the infrastructure companies. So, there were all these undersea cables laid down.
No, no, but I'm saying those cables are still being used, but those companies went bankrupt 20 plus years ago, like Global Crossing. So, that's the thing. right now, you're investing a lot in AI, a lot meaning many of these large companies have even hired people at $100 million salaries, hired a two-person firm for $500 million, that kind of thing, then you're investing in these data centres, which is a lot of real estate, a lot of very fast depreciating equipment, and a lot of power.
So, are you going to make returns on that? That's the question because when the schools and colleges shut down, many of these AI systems, the usage dropped 60-70%, so that's not a paying population. So, will you make return on capital on all this?
who will succeed? And whether, you know, even looking at older technologies, if you look at the 20th century, which are the two technologies which changed how human beings lived, aviation and automobiles, and both were a graveyard of companies. They haven't made money for investors.
So, even if a technology succeeds, doesn't mean it will necessarily make you a lot of money. So, new technologies are very risky. There are like, there was this guy who used to write a technology column when he retired after 40 years.
He gave a list of all the technologies that were launched with so much fanfare. I mean, look at Facebook changed its name to Meta. What's happened to that?
Or Google Glass, or 3D television? A whole lot of things.
So, when we talk about AI in the way we are seeing it today, some of it will obviously work, and many of these companies are actually doing well. I mean, they already have running good balance sheets, and maybe they are investing heavily.
Actually, the balance sheets have deteriorated. I mean, there's a lot of debt also being raised in AI, both for these existing larger companies, as well as these companies which have no revenue or profits. So, that's another danger.
Even in India, when TCS announces that they want to set up a data centre, the stock price fell. It didn't crash, but it definitely fell. What does that tell us?
See, Indian IT companies will be, I mean, my bet is that they have seen many pivots in their life from, you know, Y2K. After Y2K, they were supposed to have no business left. Cloud came, digital came, also AI came.
So, that they will adapt because I don't see mega corporations handing over the keys, so to speak, to an AI. They will always need these intermediaries to make sure that AI does what it's supposed to do. So that they will do.
I mean, my bugbear with them, which has been long standing, has been that they have done nothing to move up the value chain. Now, they always had huge amount of cash, they had access to trained human beings, but they have done nothing with that. So that is a different thing, but on their IT services model, they might not employ as many people.
So that's more of a danger for the Indian economy. So the last 25 years, IT, ITES, has been the big employer, and then, of course, there's a whole ecosystem that comes around that, the security guard and the driver and the food delivery, but they were the primary driver of employment. So that's another question, but the companies themselves, I think, will be able to navigate.
So they don't need to get into data centres, is what you're saying?
No, no, I mean, that's okay, they might need to also.
That's a big shift. All of this so far has been IT services, manpower, and data centres is exactly what you're saying. These are large companies.
Yeah, so I mean, let them try and see how it works out, yeah, but it's not something that they should not look at at all, I am not of that view.
So as you look ahead, we're nearing the end of 2025, how are you sort of looking at 2026, what's the kind of portfolio construct that you would recommend or suggest? I mean, it could be the same as before, but is that right?
so I mean, probably the same, I mean, we've been underweight U.S. this whole year, we became overweight Europe slowly from the beginning of the year, China, we had been overweight from last year itself, so that has continued, so we're just watching, as I said, I see the risk building up, so we obviously have investment in tech, though it is underweight relative to the benchmark, but definitely there is building up, I mean, otherwise, I have never in 30 years given an index projection, because I think that's complete nonsense, and actually Bloomberg did data analytics on that, because in the U.S., that data is available going back many, many decades, and basically it's not what the paper it's written on, I mean, every big name in the world, all the projections they give, you know, the Citicorp and HSBC and Morgan's and Merrill's and good.
So, I mean, so, this is the data that they are off on the average on the S&P projection by 15 percent points, so if they say plus 5, it can be minus 10, it can be plus it can be anywhere, and the other point is that they all cluster between 0 to 10 percent every year, that's a safe place to be, but in 100 years the S&P has moved between 0 and 10 percent only 14 times. So, you know, it is complete, complete nonsense, so, I mean, absolutely, absolutely, I mean, I saw someone saying that, oh, this, I wouldn't name the firm, but they have said that index target is 95,000 for Sensex next year, and their projection for this year was 93,000, so nobody is holding you accountable for what you said last year and the year before. So, this is something Daniel Kahneman calls objective ignorance, things which you not only don't know, but you cannot know.
So, I didn't know the term, but for 30 years I have never on the new Samvat or January given any sort of estimate for where the indices will be. As I said, equity markets are not predictable in the short term, so that's why I say never have 100% in equity, because equity should have money you will definitely not require for the next 8-10 years. So, even if you are young, sometimes people say, I am 25 in a good job, should I have 100% in equity?
No, I mean, you might lose your job, there might be a medical emergency, you might need down payment for a home, so at least some portion has to be in more easily accessible and more predictable investments.
And how would you look at the India part? and the reason, let me sort of back this up, back up a little bit, this has been a very unusual year, right, we've seen, since 2nd April 2025, we've seen a new world, we've we've world is very right now, there are many countries like India which are moving up and down, India has macroeconomic signals are quite strong, at least for the recent months. Now, is all of this adding up to something good as we go into the next year or how are you seeing it?
Because we have not touched on macro at all.
So, I mean, as far as US is concerned, see, if you had asked me last year, I would have still said that US has outperformed for a long time and at some point that will come to an end. But I did not think it was imminent. But Trump to some extent has, I think, hastened the end of that.
And not just in market terms, I think he has hurt US on a longer term basis because US had this image, some of it wrongfully so, of a place with great rule of law. I think they have the most awful judicial system, but they had this image that good rule of law, good institutions, freedom of speech. And that is the reason, I mean, US was not just a rich country, there are other rich countries, but none of them could attract talent the way the US could.
And that is what you are hurting. And a lot of other countries are taking advantage of that. A lot of Western European countries are contacting researchers in various fields in the US and saying, you know, blank check, come here with your team and your research lab or whatever.
So, that is another factor. As far as India is concerned, as I said, I do not see any big risk. Macro stuff, which will also, as I said, I think the earnings will improve from the third quarter.
And part of the reason is consumption has ticked up. Again, so much of the narrative is through the market view. So, actually the trough in consumption was 23-24.
But I think I was the only person in 24 talking about that the consumption is at a 21-year low. It is only when the market started falling in September that suddenly everybody discovered private consumption growth. So, private consumption growth had fallen below 4%.
The last time it was that low was 21 years before that. So, now it has been accelerating. Inflation has come down.
Food inflation has come down. In certain cases, food prices have fallen. So, more room in the household budget to buy everything else.
Though, I mean, I have seen the other side now that rural consumption is slowing up with. So, that is the flip side to food prices coming down. And also for companies, some of these prices have come down.
Crude has come down, which means petrochemical prices have come down. So, there is a positive on the margin front also. Then GS.
So, I was expecting improvement when the second quarter started. I thought that July to September you will see better results. But then in the middle came GST. So, it was clear that some of it would get pushed because there was just confusion and disruption. And even though overall it is a positive thing, but that meant that the earning improvement, I think it got a little push to Q3. So, you will see better earning. As I said, the P's are not that high to start with.
So, those are the positives. Of course, things are not quite as good also as some of the numbers because if you see, if everything was that great, the RBI should have cut rates further because you have as benign an environment as you can. And I think two unstated things is, one is that the cut in interest rates, the markets have not really brought down rates to this extent.
In fact, some of the state bond issues are not getting subscribed. And also the other thing is which you are not talking about is the currency because now the interest rate differential between India and US and other Western countries is the lowest. It is in the 2% range.
Norm is around 5%, peak is around 7.5% or so. So, as per that if any interest rates are low, you will attract less money and therefore the currency there is pressure. So, that is the other part.
I was just looking at data yesterday that the NRI deposits are falling because again the interest rate differential is now no longer as attractive. So, those are the unstated kind of pressures. So, I mean whether you should at all try to keep the rupee up is another question altogether.
You know that is a whole different debate.
There are some who are arguing for gradual depreciation or letting it go where it is or where it will go.
And in fact that is the reason, one of the reasons why Indians should invest globally and they don't. I mean I always give this number that when I started working the dollar was 12 rupees. So, in the less than a career you have a 90% depreciation.
So, when you are talking of long term planning, long term financial goals, 10, 20, 30 years hence how can you forget this. And now if anything the foreign exchange expenses have been rising, you know more kids study abroad, people travel abroad more and more. So, you should definitely diversify out of India, but that is not like a one year knee jerk thing.
So, I mean right now because India hasn't done well, people say oh let's take global. In 2022 I had the reverse thing, people said why did you tell us to buy global when this year you know India has done so well. So, it is a more a long term asset allocation that you have to think about.
Last question and in a way to maybe sum up what you have said is how do you then set your benchmark for long term investment or investing? Is it a time benchmark or is it a personal return benchmark?
I think first of all I mean investing is neither as simple nor as complex as people make it out to be. So, don't try to optimise. You are okay if you get 85% of the way there.
So, don't look for the multi bagger. Get your broad asset allocation right, put the risk management parameters especially stop loss in place, do proper global diversification. That's all you need to do.
So, first of all look at where you are invested currently. I mean that's the first part. I mean most people don't even know what their current investment looks like, how much is in real estate, how much is in gold, how much is in fixed income, how much is in equity.
So, you do that and then do a conscious decision on that and as I said don't have 100% in equity. Gold is another thing people keep talking about. Yes, have something in gold and silver but not a huge amount.
I mean our grandparents, our grandmothers were very right in investing in gold because then you could not invest globally. So, that was the only hard currency asset you had access to. But now that's not the case.
I mean it's quite run up too much and I mean we have gold in our global multi-asset or even for that matter India multi-asset but single digit allocation it is not like 25% or something like that you know.
Thank you so much for joining me here.
Thank you for having me.
