“Invest for the long haul. Don’t get too greedy and don’t get too scared." -Shelby M.C. Davis

Collateral Damage

As we look at the situation in the markets today, there is increased nervousness regarding a whole host of things and there is reason to step back and evaluate the current situation. As we are aware, markets don’t like uncertainty. Why is the current bout of uncertainty more worrisome than before? Why are geopolitics casting a shadow on the India story? Why are small caps down so much?

Davos, Chaos and the new world order

We have just heard speeches in Davos regarding the onset of a new world order. There was the old order where western nations were united in ensuring homogeneity, fairness and an international understanding of how trade worked within a shared legal framework that ensured mutual respect and adherence to these rules. There was also an econo-political model surrounding trade relations and agreements. All of this is on the anvil of change today. This is enough to create an enormous amount of uncertainty among the Western Trading bloc and the world order where the West including the US traded with the rest of the world on their terms largely. All countries strong enough to leave this cohort were either treated as pariahs or were given bilateral attention whenever the need arose. This was backed by a strong US military and political presence globally ensuring the enforcement of this so called “world order”.

Come January 2026, it all is threatening to unravel. This is sending alarm signals across existing so-called allies of the US and most western capital markets. The old order no longer can be relied upon to help understand what is likely to happen here on. New realities will shape business and trade going forward. We should note that this only is a change, not a breakdown. And in certain terms probably the need of the hour. That it is being caused through a sudden move is the only reason markets are skittish. Brexit was the first salvo in this direction, and the UK has renegotiated with EU and other nations over time and the work goes on. And so will the current situation yield to newer terms of trade among partners, albeit without the US umbrella and the understanding shared regarding defense and security safeguards that were tacit. It calls for greater scrutiny and new terms of trade and possible increased domestic defense spending than before especially among European nations.

What impact does this have on India?

When such events are happening around the world India cannot remain immune to it. However, in a curious way these situations can be very constructive for India, if India plays its cards right. This is the moot point. India too must react nimbly and rise to counter the new challenges in a manner that helps its people, channels capital flows into the country becomes an alternative to China in many ways and offer itself as a promising and “open for business” economy. Given past experiences this may not be possible instantly and a dramatic change in political and economic thought must be undergone for such a possibility to occur quickly. While I am not an optimist regarding the quick turnaround, I am doubly hopeful now of India achieving its global ambitions, more than ever before

What does this mean for markets?

Volatility is here to stay

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Until a semblance of normalcy returns markets will remain volatile and “safe havens” such as gold, silver other precious metals and certain currencies may rocket up in the short term

• Credit markets are at greatest risk and allocation into global debt markets can be much more risky in such times

• India will weather the storm in a much better fashion with the domestic nature of its economy and the retail nature of its capital market participation. With no serious drawdown expected in view of robust earnings growth, retail participation can be expected to continue leading to stable narrow markets

India remains a relatively protected market from a fundamental sense given the current change in the world order. Only secondary and tertiary impacts can move markets in the interim.

Why are small cap stocks taking a hit?

The valuation specter has come back to haunt small caps. While in a buoyant situation investors are willing to pay higher multiples in a much more globally uncertain environment investors may be unwilling to give such multiple anymore. Small caps sustained valuations due their illiquid nature, huge demand (from mutual funds) and relatively benign redemption pressure. Chinks however are visible today with some asset allocators lightening exposure in this segment. But individual companies will dictate the stories and weaker earnings growth companies can be susceptible to significant drawdowns. Traditional valuation metrics will be back in fashion!

Investors are encouraged to continue their asset allocations from a longer-term perspective and not act in haste. All the higher returns included in this asset class in historic charts include sharp drawdowns, so in effect, selling now will ensure lower prospective returns on the overall portfolio over the longer term.

“The stock market is a device to transfer money from the impatient to the patient.”

Warren Buffett