April 2026: A chronicle of the last two years in the Indian equity market
In 2026
- April 2026: A chronicle of the last two years in the Indian equity market
- March 2026: Crises present an opportunity to buy at depressed prices
- February 2026: Indian corporate growth picking up
- January 2026: Severe correction in the broad market
We want to use this newsletter to recount some of the events and happenings in the Indian equity market over the last 2 years and the actions we have taken as portfolio managers for our clients.
About two years ago we began to get concerned about the rising valuations of the market and its constituents. In March 2024 we wrote about India’s market cap to GDP which was trending higher than history. In August 2024, we wrote about the high valuations of the market, pointing out that at the time 47% of the BSE-500 constituents were trading at a Trailing Twelve Month Price to Earnings (TTMPE) above 50 and this cohort represented 36% of the market cap of the BSE500. Meanwhile we had been talking about the high valuations in the months preceding our August 2024 newsletter. We had been selling the expensive stocks in our portfolio as it climbed and by September 2024 we were sitting on about 25-30% cash in our portfolio. This is in line with our discipline whereby we reduce those stocks in our portfolio which have become expensive as compared to their historical valuations.
As it turns out, the Indian market peaked in September 2024 and it has been downhill since then. The market corrected significantly in the months to follow with the market making an interim low in February 2025. We used this opportunity to deploy some of the cash we held and by February 2025, the cash in the portfolio had fallen to about 12-15% of the portfolio. During this period, we were adding some general insurance companies to the portfolio like Godigit and also adding to our existing position of ICICI Lombard, besides adding a few positions like Metropolis Healthcare and Indiamart Intermesh. We were orienting ourselves to higher growth businesses than in the past after having sold low growth businesses (e.g. Castrol and Mahanagar Gas) in the period leading up to the September 2024 peak. You may ask why we invested in low growth businesses in the first place. The reason is that in the manic fury of the multi-year rally leading up to September 2024, most high quality businesses were trading at obnoxious valuations (evidenced by 47% of the BSE500 constituents trading at a TTMPE higher than 50) and we sought refuge in high quality businesses which were trading at reasonable valuations though their growth rates were on the lower side.
What followed after the Feb 2025 interim low was Trumponomics. Donald Trump imposed tariffs on different countries as per his whim which caused a lot of uncertainty across global markets. Tariffs on India eventually reached 50%, apparently because India was buying Russian oil which was a cause of consternation for Trump. The 50% tariffs were a great market dampener and the Indian market suffered enormously.
Just as the tariff mess got solved because the Supreme Court of the US (SCOTUS) decided that the tariffs were illegal, another issue surfaced. US and Israel launched air strikes at multiple places in Iran on 28 February 2026, and started a war which has now lasted 2 months. As a consequence, Iran has closed the Strait of Hormuz and thus blocked 20% of global supply of oil. In latest developments, US has now imposed a blockade on all ships entering or leaving Iranian ports. This is a huge problem for India because India imports about 88% of its oil requirements and more critically it is dependent on gas coming through ships through the Strait of Hormuz. The Indian government is prioritizing gas for domestic cooking purposes and as a result gas supply has been curtailed to commercial establishments and industry. This is a tricky situation and could have far reaching implications on India if the Strait of Hormuz does not open on a regular basis as it was before the war.
The Indian market fell 11.3% in the month of March and we have used the weakness during this period and before to deploy the remaining cash in the portfolio. As we have explained in an earlier newsletter, the situation in end-March was quite dire, with 69% of the BSE500 constituents down 30% from their All Time Highs (ATH) and 34% of the constituents down 50%. During this period and in the months prior, many different stocks came within buy range for us, particularly some of the new age companies like Info Edge and PB Fintech to name a few. These are great businesses in our opinion, where these players have an almost unsurmountable competitive edge and it may be that they are the winners in these “winner take all” kind of market situations. The huge fall in the market has brought these stocks down to reasonable valuations on Enterprise Value to Sales (a proxy for those stocks which have not hit peak profitability yet). As such we feel comfortable investing in these wonderful companies which are now trading at reasonable valuations.
The core of our portfolio remains private banks (HDFC Bank and Kotak Bank) as also ICICI Lombard, which we believe are leaders with a competitive edge. HDFC Bank and Kotak are hampered in terms of their stock market performance because the market mistakenly believes that in this time of low non- performing assets (NPAs) for the system at large, PSU banks appear more attractive. However, we believe that PSU banks have structural disadvantages against private banks (high average cost per employee , about 2x private banks, inability to compensate top management because PSUs are constrained by the President’s salary and a general PSU inefficiency). While PSU banks have got back some share on loans, their deposits market share continues to slip and eventually deposits market share is what matters.
While we understand that the consequences of this war are severe for India’s macro, we believe that this crisis too shall pass as have many crises we have experienced over the last two or more decades. Crises produce great opportunities to invest for the long term and we expect this time to be no different. The market has recovered a bit in April (up 7.5%) and some of the juicy opportunities have retreated a bit, but this remains a fertile ground to get more money invested in the market.