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Equity Market Insights:
And It All Falls Down…
Over the past few quarters, we’ve consistently shared our view that a valuation reset was overdue in India, particularly in the mid and small-cap segments. This quarter, that reset finally arrived with the sugar rush coming to an end.
During the quarter, Indian equity benchmarks posted their fifth consecutive monthly decline, marking the longest losing streak in nearly three decades. For the three months ending March 2025, the BSE Sensex fell by 1.39%, while the BSE Mid-cap and Small-cap indices dropped by 11.02% and 16.34%, respectively. As anticipated, mid and small-caps corrected more sharply due to frothy valuations.
A combination of average Q3FY25 earnings, sluggish economic data, and persistent FII outflows weighed on the sentiment. While the Union Budget offered some relief with generous tax giveaways, and the RBI followed with a rate cut and liquidity support, these measures weren’t enough to offset broader concerns.
The biggest trigger for the selloff? Rising global trade tensions. Policy flip-flops from the Trump administration led to heightened volatility, with global markets swinging between gains and losses. Relief came only when a 90-day pause on tariff hikes was announced, covering most major trade partners, including India. Still, sentiment remains fragile, especially with US-China tensions flaring up again.
This market correction opened up opportunities for us to realign portfolios in line with our strategic asset allocation framework. We’ve been advocating an equity-light stance as markets were at elevated valuations. But we acted when the market corrected by around 10–15% from the September 2024 highs, and valuations in large-cap, value-oriented funds approached historical averages.
We mostly managed by shifting allocations from debt to equity within existing portfolios, as compared to the infusion of fresh capital. This reinforces our belief in maintaining funds in fixed income so that we can respond when markets present opportunities. At more reasonable prices, we can nibble in! Even in our very aggressive portfolios, we don’t have 100% allocation to equity for the same reason.
One thing this recent correction has shown us is how quickly market narratives can shift. Indian equities went from market darlings to global underperformers in no time. This is a reminder that country-specific risks are real. Markets move in different cycles, and leadership rotates. What’s winning today might lag tomorrow. A globally diversified portfolio helps smooth out those ups and downs by spreading exposure across regions and asset classes.
Debt Market Insights:
Just when it seemed like nothing could stop the Trump momentum, the U.S. bond market sent a clear signal. U.S. Treasuries saw a violent selloff triggered by Trump’s tariff announcements in early April. This caused massive uncertainty, leading to a spike in yields and a decline in market liquidity, raising fears about the bond market’s fragility and functioning.
Within days, the 10-year U.S. Treasury yield surged from below 4% to over 4.5%, while the 30-year yield briefly topped 5%. These moves reflected investor concerns about higher inflation due to tariffs and weaker economic growth prospects.
Back home, Indian bond markets remained relatively stable during the turbulent time witnessed in the US. With inflation easing to a 5 year low at 3.34% in March 2025 and appearing well-contained in the short term, the RBI delivered its first back-to-back rate cuts in nearly five years. As a result, the benchmark repo rate has come down to 6%, and the policy stance has shifted to ‘accommodative’, indicating that there may be further room for easing.
The GDP growth forecast for FY26 has been revised down slightly to 6.5% (from 6.7%), while the inflation forecast was lowered to 4% (from 4.2%).
Another positive development: starting January 31, 2025, Indian government bonds have been phased into Bloomberg’s Emerging Market Local Currency Government Index, building on their earlier inclusion in JP Morgan’s index in mid-2024. These inclusions have boosted global visibility, increased foreign investor participation, and enhanced liquidity in India’s debt markets. That said, we notice the broader trend of slowing allocations to emerging markets has tempered inflows to India as well.
In the current environment, we continue to maintain a conservative stance on portfolio duration, preferring maturities of up to 1.5 years. We believe longer-duration bonds currently offer an unattractive risk-reward profile, especially given global uncertainty and the potential for volatility in yields.
For short-term cash management, arbitrage funds remain a smart choice given their superior tax-adjusted returns. However, considering their tendency to exhibit volatility during sharp equity market corrections, we recommend complementing them with ultra-short-term debt funds to maintain balance and liquidity.
Other Asset Classes:
Gold continued to do what it does best – act as a reliable portfolio diversifier. During the January-March 2025 quarter, gold prices surged by 17.27%, reaffirming their role as a hedge amid ongoing global uncertainty.
As we’ve consistently advocated, maintaining a strategic allocation of 10–20% to gold can enhance portfolio resilience, especially during periods of heightened global economic uncertainty. This quarter was another strong validation of that view.
Coming to real estate, the broader Indian housing market remained stable, with residential sales across the top eight cities rising 2% year-on-year to 88,274 units during the January-March period. But a sharp divergent trend is noticed underneath. While affordable housing saw a decline, premium and luxury segments registered robust growth, a reflection of evolving preferences among affluent buyers.
Real Estate has become expensive, and we are advising our clients against fresh purchases. Given multiple other factors like illiquidity, cyclicality, price volatility and longer holding periods, we recommend keeping exposure within 20–25% of your total assets.
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Truemind Capital is a SEBI Registered Investment Management & Personal Finance Advisory platform. You can write to us at connect@truemindcapital.com or call us at 9999505324.