Navigating the Great Reset: Market Insights from the Frontlines

"What doesn't kill you makes you stronger." – Friedrich Nietzsche

The famed German philosopher's words have never felt more relevant to today's investors. The past six months have challenged even the most seasoned market participants, creating what might be the most difficult investing environment since the COVID pandemic roiled markets in 2020.

The Perfect Storm

What began as a routine correction in Indian markets has transformed into something far more significant. Foreign institutional investors have withdrawn over $25 billion since January 2024, valuations in small and mid-cap spaces have corrected sharply, and growth momentum has slowed across sectors. But these domestic challenges pale in comparison to the global paradigm shift now underway.

We are witnessing nothing less than a reset of the global rules-based system that has governed international trade and finance for decades. The world is rapidly transitioning to a multi-polar economic and trade system—a development with profound implications for investors worldwide.

The Trump Administration's Impact

President Donald Trump's first 100 days have been marked by swift, decisive action on campaign promises that have sent shockwaves through global markets. His administration's approach to immigration, implementation of reciprocal tariffs, and reconsideration of longstanding security arrangements have created an atmosphere of extreme uncertainty and, in some cases, animosity among international partners.

This uncertainty will likely characterize at least the next 12 months as the administration works to implement major policy changes ahead of the 2026 midterm elections. While the recent 90-day cooling period on tariffs provides temporary relief, markets must now contend with the challenge of refinancing approximately $9 trillion in US debt over the coming year.

Companies worldwide are being forced to recalibrate business plans and supply chains to adapt to the changing global trade landscape. The substantial "channel stuffing" that likely occurred ahead of the anticipated April 9th tariffs (now suspended for 90 days) could create a lull in economic activity in the near term.

The End of a 40-Year Trend

Perhaps most significantly, we appear to be witnessing the conclusion of a four-decade era (1980-2020) characterized by falling bond yields and shrinking risk premiums, supported by coordinated central bank actions during crises like those in 2008 and 2020.

The future points toward higher risk-free rates alongside expanding equity risk premiums—a combination that will inevitably affect equity valuations in the years ahead. A concerning sign is the recent spike in long-duration US bond yields despite the risk-off environment, behavior that differs markedly from previous market crises.

Trade Tensions and Opportunities

The ongoing trade confrontation between the US and China has created both challenges and opportunities. While an estimated $700 billion in gross trade has been disrupted, countries like India may emerge as winners from this reshuffling of global trade patterns. Reports suggest a favorable trade agreement between the US and India is in development, which could enhance India's long-term growth prospects.

The Indian Market Perspective

September 2024 likely marked the end of the extraordinary bull cycle in Indian markets that began during the depths of the COVID lockdown in April 2020. The question now is whether we face an extended bear market or a temporary correction.

Our analysis suggests continued caution is warranted. Despite steep drawdowns since August-September 2024 highs, valuations across most market segments remain above long-term median levels, particularly in the mid and small-cap space.

Examining the top 1,000 listed Indian companies reveals that while the number of highly valued companies has decreased significantly, these numbers still exceed levels seen during previous market cycle peaks in 2007 and 2017. In fact, current levels remain higher than even the June 2022 interim low that followed the Russia-Ukraine crisis.

This suggests that much of the return generated in the last two years of the bull run came from expanding valuation multiples rather than underlying earnings growth. While we've experienced a significant correction, further adjustments may be necessary, though likely less severe than what we've witnessed between September 2024 and March 2025.

Reasons for Optimism

Several positive factors may limit further market declines:

1. Resilient Corporate Performance Outside the banking, energy, and metals sectors, India's top 750 listed companies delivered 10% year-over-year topline growth and an impressive 19.5% year-over-year profit before tax growth in Q3FY25.

2. Stronger Corporate Balance Sheets Indian companies are entering this downcycle with significantly healthier finances than in previous downturns:

• FY 2006-07: Average Debt to Equity of 1.39x
• FY 2016-17: Average Debt to Equity of 0.52x
• FY 2023-24: Average Debt to Equity of just 0.34x

3. Attractive Structural Returns India maintains higher return on equity metrics compared to global peers:

• India: 16% long-term average ROE
• USA: 15%
• France: 12%
• China: 10%
• UK: 9%

4. Accommodative Monetary Policy India's central bank has become increasingly supportive with:

• Back-to-back rate cuts for the first time in five years
• Liquidity injection exceeding INR 4.5 lakh crores since January 2025
• Reduced risk weights for NBFC loans, releasing capital for sectors like housing

5. Consumption Catalysts Major stimuli for domestic consumption include:

• Tax relief affecting approximately 70 million individuals starting April 2025, potentially injecting 2-2.5 lakh crores into the economy
• Implementation of the 8th Pay Commission from 2026, benefiting over 10 million government employees and pensioners

Risk Factors

Despite these positives, several concerns warrant attention:

• Potential increases in Indian bond yields due to government revenue shortfalls
• Decision-making paralysis among corporations due to global uncertainty
• Stalling private and government capital expenditure
• Worsening fiscal conditions among state governments
• Pressure on corporate profit margins
• Potential credit quality deterioration in the financial sector

The Merisis PMS Strategy

In response to these market conditions, we've recalibrated our investment approach:

1. Rigorous Selection Market conditions demand ruthless discipline in stock selection as mortality rates remain elevated.

2. Reduced Small and Mid-Cap Exposure We've decreased SMID exposure to 40-45% (from over 60%) due to persistent valuation concerns while remaining alert for growth at reasonable valuations (GARV) opportunities.

3. Focus on Strength and Momentum Prioritizing companies demonstrating both relative strength versus the BSE500 and strong operating momentum.

4. Sector Rotation Increasing exposure to defensive sectors with predictable cash flows (healthcare, utilities, telecom) while targeting opportunities tied to government capital expenditure programs (railways, water, power transmission).

5. Pro-Inflation Positioning Building selective positions in chemicals, agriculture, building materials, metals, mining, and energy sectors while maintaining valuation discipline.

6. Consumption and Financial Sector Opportunities Maintaining conviction in specific consumption-related businesses and financial companies (insurance, housing finance, NBFCs, PSU banks) poised to benefit from tax cuts and the upcoming pay commission.

7. Selective Manufacturing Exposure Carefully identifying opportunities in pharmaceuticals, automotive, capital goods, industrials, and defense sectors that stand to benefit from "Make in India" initiatives and potential bilateral trade agreements.

8. Precious Metals Allocation Continuing our allocation to gold and silver, which we believe will outperform global equities over the next 1-2 years.

Performance and Lessons

For the fiscal year ending March 2025, Merisis Multicap delivered a 1.7% return versus 6.38% for the BSE 500 TRI. While this outcome falls short of our expectations, we take pride in our tactical decision to become fully invested by late February 2025, which contributed to an 8.58% return in March 2025 (outperforming the BSE 500 TRI's 7.74%).

Two valuable lessons have emerged from our recent experiences:

1. Timing Matters Being too early in identifying opportunities can be equivalent to being wrong. While our bullish stance on housing finance stocks was structurally sound, the anticipated operational performance remained elusive for several quarters, leading to underperformance.

2. The Illusion of Relative Cheapness Bull markets can create misleading reference points for valuation. One of our largest positions—an MNC flexible packaging company with sustainable packaging capabilities—appeared attractively valued at 1.1x Price/Sales but is now available at 0.5x Price/Sales following unexpected challenges (weak pricing power, competitive pressures, product mix deterioration, and implementation delays).

Looking Forward

We've realigned our investment strategy to prioritize high growth visibility over the next 4-6 quarters while maintaining strict discipline regarding entry valuations. While FY26 will likely be characterized by consolidation and regrouping, we're confident our positions will deliver substantial returns beginning in FY27.

We remain deeply grateful for the trust our clients have placed in us as stewards of their capital. Though we cannot predict the future with certainty, we are well-positioned to capitalize on market dislocations that will inevitably arise in the coming quarters.

Final Thoughts

Two principles guide our investment philosophy:

1. The Holy Trinity of Investing Successful investing requires discipline, knowledge, and wisdom. While knowledge forms the foundation and wisdom comes through experience, discipline remains the critical ingredient for generating superior market returns.

2. The Cyclical Nature of Returns Like most aspects of life, investment returns follow cyclical patterns. Periods of exceptional performance give way to consolidation, which in turn creates the conditions for the next phase of growth.

As we navigate these challenging markets together, we remain committed to applying these principles with unwavering dedication.

To invest in our PMS strategy, click here

The views expressed are personal and do not constitute investment advice.