Enough has been said about the poor performance of the Indian stock market over the last two years. The benchmark Nifty is down 18% from its record high of 26,373.20, scaled on 5 January this year, while over the last two years, it has delivered a negative return of 13%. Year-to-date, the index is down 14%.
You ask an investor why this market has been down, and she will probably cite key reasons as increased geopolitical risks, higher oil prices, foreign capital outflows, US tariffs, the lack of AI tarde, and weak earnings.
While these are valid factors, ace investor and a market veteran Shankar Sharma, also the founder of GQuant Investech- an AI firm, makes us recall his famous “the lake of returns theory”, according to which, a market’s strong performance is followed by a period of negligible returns.
The biggest factors behind the market’s poor show
“It goes back to my lake of returns theory. I said in 2024, dollar returns from the main line indexes are going to be below par. And that it is unlikely that these main indexes are going to deliver anything substantial for investors for the next few years. That is what is playing out,” Sharma told Mint.
Sharma believes the cited reasons behind the Indian stock market’s poor performance, such as selling by FPIs, the lack of AI tarde, disagreements on economic data, and so on, are simply convenient reasons.
“The core reason is that the Indian market had a good run from the pandemic to 2024, and a substantial period of negligible returns was going to follow as per the law of returns theory of mine,” he said.
“As regards foreign selling, the fact of the matter is that the large companies do not have ideas to deal with the new world. They have simply taken the easy pickings from the domestic consumer, and they have not thought anything beyond that,” he added.
Sharma reiterated what he has been saying for a long time: domestic consumers have limits to profitable growth, and now that we have pretty much exhausted that market, the rest of the market does not offer substantial profitable growth for Indian companies.
“The strategy of focusing only on the domestic market had its time and day, but that is no longer available to the same extent. If you look at our banks, over the last 30 years, all they had to do was take market share away from the state-owned banks. But there is a limit to that, and now for our banks, which are 40% of the main indexes, are finding that you can’t grow assets and protect your margins simultaneously,” he explained.
The same goes for several other industries, such as the automobile industry.
Sharma offered an example from his personal experience: he wanted to buy an Indian electric vehicle in Dubai but could not find any, as Indian companies do not sell there.
“Indian companies do not try to globalise their businesses. It comes back to a protected domestic market which has offered great market capitalisation to the companies, but in the process it has made them inward-looking, with no global presence and no innovation,” said Sharma.
“It is the mercantile class that largely runs corporate India, and the mercantile class in India has historically had a limited scientific bent of mind. In the process, the surge in domestic retail money has given Indian promoters a godsend opportunity to monetise their market capitalisations. Much of that wealth has flowed into financial assets rather than into building genuine, productive businesses in the real economy,” Sharma said.
“Developing the kind of global outlook and scientific mindset required to build such businesses will take time for Indian companies. And, at least for now, I do not see our large corporations making that transition anytime soon,” Sharma added.
Where are money-making opportunities?
Sharma has been bullish on smaller Indian companies, especially since March this year, and, according to him, his strategy has played out beautifully.
“The smaller companies are innovating much better than the large ones, and this is creative destruction in which the market value of the larger companies will keep eroding over time while the smaller companies keep gaining because they are more focused on Innovation and international businesses,” said Sharma.
“Every single company that I associate with, I tell them exactly these two things: spend on international business and on innovation, and I can see them doing exactly that.
Therefore, the market cap shift is going to keep happening away from the large companies to the smaller companies,” he added.
Mutual fund sahi hai?
Sharma underscored that investing in mutual funds may not yield substantial returns for retail investors after accounting for taxes and associated risks.
“It has been my view that mutual fund investing is not going to deliver anything substantial after adjusting for taxes and risk. It is not that retail will listen to me and stop investing in mutual funds! The fact of the matter is that the data are very clear that for domestic investors at the retail level, return of capital is more important than return on capital, and equity markets definitely do not promise either,” said Sharma.
He said most small investors will not have the staying power simply because they do not have the financial bandwidth to endure long periods of zero returns.
“If you think about it, just the fact that the main line indexes have delivered negative returns for 2 years or more means that in real terms, investors are down between 20 and 30%, depending on what alternate hurdle rates they have. This kind of loss in real terms is simply not possible for small investors to tolerate,” he added.
Then, what should investors do?
He believes that fixed income, gold, and small pockets of real estate are the only long-term, durable return sources for most Indian investors, underscoring that equity investing is for deep-pocket investors who can tolerate the volatility and the risk because they have the financial capacity to do so.
“The financial market has given a mass of profit to derivative brokers, wealth managers and asset managers. These people have used the wealth of retail investors to enrich themselves. They have bought expensive homes as well as created their own investment pools. They have created a market cap for themselves and their businesses. But the question that remains is: Where are their customers’ yachts?” Sharma concluded.
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Disclaimer: This article is for educational purposes only and does not constitute investment advice. The views and recommendations expressed are those of the expert, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
