From their peaks made between late-September and early-December, various market indices have fallen sharply. The Nifty 50 index is down by 13%, Nifty 500 and Nifty Midcap by 16%, while the Nifty Small cap and Microcap have fallen by about 20%. It is the fall in the last two indices that is causing a lot of distress.
Over the past three years, the character of the Indian market has changed dramatically. NIFTY or even Nifty 500 does not represent the market that we have just experienced. Since 2021, small- and mid-cap stocks have skyrocketed and form the core of the market today as retail investors and many mutual funds piled in.
These days, most initial public offerings (IPOs) are from micro-cap companies, not even small-caps! The latest definition of a small-cap stock is one with a minimum market-capitalisation of around Rs10,000 crore and a mid-cap stock is one with market-capitalisation of anywhere between Rs35,000 crore and Rs100,000 crore. Together, they form the core of the market and the outlook for this segment is not great.
The leading indices actually hide the bloodbath in most of the high-flying stocks of this segment which have fallen by 30%-40% or more. The fall has been indiscriminate, irrespective of whether their latest results have been good or not. The market mood is something like this: if the results are bad – sell; if the results are good – sell, because valuation is too high. This syndrome has affected dozens of sectors and sub-sectors.
Where do we go from here?
If it was a ‘correction’, is it over and will the bull market resume its journey? Well, I am not sure if this was a correction and whether it is over; but one thing is certain: a bull market of the kind we witnessed in the past few years is not about to return anytime soon. That bull market is dead for now.
Anatomy of a Bull
Bull markets rise on the basis of several medium-term triggers, some local, some global. The 2021-24 bull market had multiple triggers: a strong global and local economic rebound from the COVID-induced recession in 2021, followed by huge capital expenditure (capex) by the government across multiple sectors—railways, defence, transportation, renewable energy, civil works, water and sanitation.
This sparked a stock market boom, attracting millions of new investors and social media influencers, pushing stock prices (especially small-caps) and creating a self-reinforcing cycle. But now the post-COVID economic recovery is pretty much over and growth is slowing.
As a result, government income is taking a hit, leaving less room for capex. The Budget still has a massive allocation of Rs11 lakh crore, but project sanctions are slowing down. For the first five months of 2024-25, the excuse for slow sanctions was elections and the model code, but that excuse is starting to wear thin. In short, the boom is over and the self-correcting normalisation cycle is kicking in.
To add to this, Donald Trump has re-occupied the White House and has lost no time in hurling a cocktail of confusion, challenges and craziness that is hard to understand, much less to calculate its impact.
So far, every decision of the Trump administration has been bad for India. The latest is demanding and getting duty cuts for the import of Tesla cars. The government wants Tesla to set up a local factory as part of the deal, but Trump thinks it is unfair. Fortunately for us, even with 0% duty, many US products are uncompetitive or will attract insignificant sales.
But meanwhile, India’s policymaking on trade and industry will be subject to brutal and tempestuous Trump policies. In short, the Indian economy and markets now face multiple headwinds and Indian policymakers have no capacity to deal with it. Companies will bear the brunt of this storm; those with high valuations will crash.
This does not mean that there will not be sharp rallies; stocks don’t head lower in a straight line. But it is hard to see such rallies sustaining over time. There are simply no bullish triggers. India’s growth is likely to hover around 5%-6% as in the past, for reasons I have explained in several previous columns.
Economic policies remain more or less the same, the economic climate militates against enterprise, consumption remains low among the masses (because of poor income growth and high inflation) and high among the rich in a K-shaped economy. This is not a recipe for innovation and productivity-led growth which alone can lead to sustained wealth creation. High government capex in the past two years was an exception and could be the only bright spot if it continues.
As against this, India will be under intense pressure during the four years of Trump, to buy arms and oil, cut tariffs and open markets. India has no answers to savage, one-track, self-serving US policies unleashed under the new regime.
To top it all, it is not even clear whether Trump can Make America Great Again. US economic growth may slow in the second half of 2025, if tit-for-tat tariffs, tighter immigration and cutting down government ‘waste and inefficiency’, led by Elon Musk, actually start hurting the economy.
If so, it will hurt India too because the US is India’s largest export market. India has a weak capacity to withstand these negative trends that are coming together all at the same time.
(This article first appeared in Business Standard newspaper)
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