2025 – Golden Year with a Silver Lining & Lessons for 2026
“चांदी की साइकिल सोने की सीट, आओ चले डार्लिंग चले डबल सीट”. This song from the 1991 movie “Bhabhi” is picturised on Govinda and Juhi Chawla as they romance in a typical Bollywood style. Investors in gold and silver had the same romantic feeling in 2025. Their returns were prettier than Juhi Chawla and their temper bubblier than Govinda. On the other hand, investors in small and mid-caps were asking the penultimate Bollywood question – “मेरे करण अर्जुन कब आएंगे”. Finfluencers and fund managers kept on insisting k “aayenge” but there was no respite from durjansingh – the market. While this was the Indian scene, in global markets, investors in precious metals and equities rejoiced together like “Amar Prem”. Equities across US, Europe, Japan, China and other emerging markets did well. In fact, European and Chinese equities delivered almost double the returns compared to S&P 500. This sums up the Indian and global markets.
Predictions – Old lessons, relearned
Long time back, I wrote a note titled “Illusion of certainty and search for clarity” in which I argued, that once an event is behind us, the probability becomes a certainty, and everything looks clear not only in hindsight but also in foresight. This is where mistakes tend to happen and investors should be careful in extrapolating the recent past with foreseeable future. Looking back at the major events that unfolded in 2025, old lessons were relearned and once again the futility of short-term predictions anchored on recent past proved it mettle. Let me list some of the events from 2025:
- Trade war with the US and rest of the world, especially China
- 50% US tariffs on India
- Visa restrictions by US on H1-b which is India’s biggest export to the US
- Pahalgam terror attack and the resulting India – Pakistan war
- Unrest in Bangladesh
- Largest personal income tax cut in India’s history. Zero tax up to 12 lakhs
- Substantial reduction and rationalisation of GST
- AI’s rapid advancement not only in the US but also in China
All these and many other news prove how uncertain the short-term environment is and how difficult it is to predict and prepare to take meaningful actions. 50% tariffs, India-Pak war, huge unrest in Bangladesh, zero tax up to 12 lakhs (something good happening automatically seems predictable but it is not) were absolute shockers for me. None of these were the “expert predictions” in January 2025. Yet we lived through. Markets were okay. Large caps delivered some returns, car sales accelerated, inflation was curtailed and the economy hummed along. If I were told the above-mentioned negative news were to happen in January 2025, my prediction about the markets would have been much worse than what it actually turned out to be.
Prepare
If short term predictions are futile based on the recent past events, and the future is inherently uncertain, what should we do? The answer is, Prepare. This seemingly simple advice works. If we are methodical in our analysis and observations, the picture between what is known and what is unknown becomes clearer. Suddenly our ability to perceive things improves helping us in better decision making. Our present actions reflect, our past experiences and future expectations. This is a helpful evolutionary trait. At first it seems paradoxical in the sense that on one hand, there is ample evidence about short term predictions having no economic value and on the other hand evolution itself has nudged us towards this behaviour and that would not have happened, if it were not helpful to our species.
Let me share my perspective. I think we can learn something very important here. First, evolution is about resilience – survival of the fittest. We have progressed as a species by learning what not to do most of the time as opposed to what to do. This is the survival instinct. In investing, we hardly think about what not to do. Most investors are looking for what to do to get better returns. It is about efficiency and not survival. This is the trade-off. Higher efficiency leads to lower resilience and vice-versa. It is this trade-off, if handled well, leads to good investment outcomes. My sense is – first look for survival and then go for efficiency and not the other way around. Second, past experiences are helpful if they are looked upon from the prism of objectivity and comparability. If you extend your horizon long enough (both in the past and for the future), things become more clearer in the present.
Present – from the lens of History
To extend one’s horizon one needs to look at past decades of business cycles, interest rate cycles, credit cycles, liquidity cycles and connect them with valuation range. In the last 75 years, India has never grown at more than 8% (real) for 3 straight years. Why will it happen now? Between 2004-08 and 2015-17 small and mid-caps outperformed large caps and then fell considerably wiping off most of the investor returns who entered in the last leg of the upswing. Why would it be different this time? US bonds yields (proxy for US cost of capital) traded in the range of 4.5% before 2008, and much higher in the 1980-2000 period. Why would they keep trading around 2% for the next 20 years? Millions (billion if adjusted for inflation) of dollars were poured in building rail roads, airplanes, motor cars, brilliant technologies of those times and most recently the internet (1990s). All had a euphoric upside followed by a crash. Why would it be different for AI this time? All those technologies are still relevant and are part of our daily lives, yet the investors who entered during the euphoria were penalised. Profits are capitalised, losses are socialised. Always. Why would it be different this time? Recent past is not history. If we can use history as our guide to make reasonable sense about the future, we shall be fine. If we are just looking at last 2-3 years and projecting that out for the next 6 months, honestly it is like throwing darts. 1 out of 10 is going to get the bullseye. But that is not repeatable.
2026
Let us look at the present without making projections. Demographics and geography play a major role in global economy. Both are in favour of India. A resilient democracy growing at much higher rates than its peers will expand its middle class. This will help domestic consumption. Pharmaceuticals is joining IT as a formidable exporting opportunity from India. Inflation (non-food non-oil) is coming down structurally due to supply side reforms. Increased spending in defence will increase our deterrence. If you would have asked an optimistic economist in 2000, what would India look like in 2025, he would be positively surprised where India is today as compared to his optimistic projections. India is doing good. All else will obviously follow. The only problem is we don’t know if revenue growth next quarter or next year will be better than last quarter, and this perfectly fine. Money that is needed for important expenditure in the near future should not be in the markets no matter how bullish you are. Keep that aside and take care of your survival. Come for efficiency and the markets will reward. The process of transferring the wealth from the impatient to the patient has begun. My sense is it will continue.
To conclude, whenever you are looking at an asset class, look at its history and not the recent past. Asset classes rotate as valuations oscillate between expensive and cheap. Indian economy has grown since 1947, sometimes slowly, other times swiftly. It will do so in the future as well. From the lens of history, current valuations for most of the market look expensive. Trade-off is not in favour. Some excesses have corrected in 2025, and some may happen in 2026, we don’t know. But there will be a point when valuations will become reasonable and smart money will start flowing in. If we have taken care of our survival, we will reap the benefits then.
Thank you and have a wonderful 2026.