January Jolt: Of Compelling Opportunities & Complacency Trap

10 Feb 2025 , 05:25 PM

The new year is here and many resolutions would have been broken by now. The air is filled with predictions and forecasts. For India, the narrative remains compelling. Our favourable demographics, significant government infrastructure spending, the rise of China-plus 1 strategy for manufacturing, thriving domestic consumption, a robust export thrust, and the growing financialization of savings—each of these factors independently has the potential to drive substantial growth. Together, they paint a picture of a market primed for a 15%+ annual return over the long term.

But as seasoned investors know, the future in stock markets hinges on the starting point. So, where are we standing as we step into 2025? Let’s take a look at the last five years – the average annualized returns in Large Cap, Mid Cap, and Small Cap Mutual Funds have been 18%, 26%, and 30%, respectively. This remarkable wealth creation has nearly doubled the number of companies within the NSE 500 Universe, boasting a market capitalization of $1 billion—rising from 251 a few years ago to 483. Only 15 companies in NSE500 delivered negative returns over last 5 years. Of the 401 companies that delivered positive returns, average returns were 34% per annum over 5 years. Seventy-three companies compounded at 50% and above up to 175% CAGR over last 5 years. Remaining 84 companies were not in listed existence.

However, this stellar performance comes with a caveat: complacency. For many investors who began their journey post-COVID in 2020, the 30% returns from small caps or the 18% from large caps may now feel like a given. But history reminds us that markets don’t always move in one direction. Periods of stagnation or even sharp declines—a 30% drop, for instance—are a natural part of market cycles.

This reality has already started unfolding in 2025, with indices experiencing sliding days and sharp corrections in mid-caps and small-caps. Such moments underline the importance of being prepared for market volatility.

The parallels with global markets are striking. In the United States, the 401(k) revolution fueled retail participation akin to the current SIP phenomenon in India. Yet, even the S&P 500, with its longest track record, could not sustain high growth perpetually. From 1981 to 1986, the index delivered a stellar 15% annualized return, only to face a flat year in 1987 that culminated in the infamous Black Monday crash.

The crash was attributed to an overheated market overdue for a correction. One of the google searches for the reasons for the crash succinctly puts it – “Many market analysts theorize that the Black Monday crash of 1987 was largely driven simply by a strong bull market that was overdue for a major correction. 1987 marked the fifth year of a major bull market that had not experienced a single major corrective retracement of prices since its inception in 1982.”

The echoes of this pattern—extended bull runs culminating in turbulence—are worth noting as we reflect on our own market’s trajectory.

The ferocious market rally in the U.S. from 1994 to 1999, where the market tripled in five years, offers another cautionary tale. It ended painfully with the dot-com bust, reminding us of the perils of unchecked euphoria.

Here in India, we are starting 2025 with a nearly 4x return in five years for Mid and Small Caps. The parallels are unmistakable. As Mark Twain said, “History doesn’t repeat itself, but it often rhymes.”  So, what’s the way forward?

As investors, this is a time for prudence and preparation. Expect turbulence and brace for corrections. Disciplined asset allocation will be the cornerstone of surviving and then thriving in the stock market. The long-term India growth story remains intact, but short-term challenges demand resilience and a focus on fundamentals.

R Venkataraman,

Chairman, IIFL Capital Limited