Buoyant Capital's Jigar Mistry on the four things markets should be cautious about

Overall, Mistry said investors must not mistake the post-COVID rally for the new normal. “The experience between COVID and September 2024 was driven by liquidity, earnings rebound, and easy policy conditions and that is not the new normal,” he added.

Even as the markets have remained flat for over a year and domestic flows continue to stay strong, Jigar Mistry, Co-founder at Buoyant Capital, believes this is not the time to throw caution to the wind. Speaking to Moneycontrol’s N Mahalakshmi as a part of The Wealth Formula podcast, he outlined four large areas that investors should be watchful about — tariffs, policy-level shifts, the nature of market flows, and volatility.

1. Tariff Tensions

While the market has taken the tariff situation in its stride, Mistry said markets should not dismiss the potential risks just yet. “When it first got announced, we were evaluating this from two possibilities, One, that this is a jawboning tactic to get countries to the negotiating table, and two, that there may be a deeper ideological shift behind it.”

He noted that the tariff situation is not without implications for India. “If a resolution takes time, you will get into $35–40 billion of CAD, and since both FII and FDI flows are net negative, your reserves get into a slightly tricky position and the sentiment around it weakens as well,” he said.

According to Mistry, while the macro impact is manageable, the micro impact on sectors such as gems and jewellery and textiles could be more pronounced. “The general area of caution is that the rupee-dollar could go for a spin if the current account deficit increases. That is something we need to keep an eye on," he explained.

2. Policy Shifts

Mistry said another area of caution is the policy-level shift currently underway in India-  from an investment-driven to a consumption-led growth model. “To some extent, it’s a risk because it reduces the potential GDP and transition takes time,” he said.

He pointed out that both the Centre and states have been deferring Capex spending to make room for consumption-related measures and pre-election promises. “The state governments are promising poll freebies far higher than what can be delivered. When we totaled the balance sheets of 16 states that went into elections recently, the number was higher than their Capex bill,” he said.

Mistry explained that this transition could dampen growth momentum. “Capex intensity to GDP is 2.5 times that of revenue expenditure. So, when you move 1.5% of GDP from Capex to consumption, you forego around 2.5% of potential GDP. Even if that plays out over three years, it’s upwards of a 75-basis-point impact on potential GDP — a higher impact than the tariff-related issues," he explained.

3. Flows driving fundamentals

The third area Mistry flagged was the way market flows have started driving fundamentals rather than the other way around. “Flows are powering markets more than earnings at this point,” he said.

He explained that while domestic flows through mutual funds and SIPs remain robust with household equity participation now at 5.6% of total savings, foreign institutional flows have turned negative. “FIIs have withdrawn close to $18 billion this fiscal year,” Mistry said.

He added that this happened even though the dollar had depreciated against a wide array of currencies. “Whenever the dollar depreciates, emerging markets tend to do better compared to developed markets. It stands to reason because, if you are a global asset allocator, in the face of a falling dollar, you would want to be outside it so that when converted, returns look higher,” he explained.

But this time, he noted that with the dollar depreciating, money did move out to Hong Kong, Taiwan, South Korea but it didn’t come to India, simply because on top of a depreciating dollar, the rupee also depreciated.

Mistry pointed out that the RBI may have miscalculated the extent of FII outflows. “Around September–October 2024, after almost two years of rupee stability, the RBI started shorting a lot of dollars in the NDF market. Peak positions reached close to $100 billion, and when you sterilize those positions, you create a large banking deficit. That gave a confusing signal that eventually the RBI didn’t have a handle. Because of that, along with valuations, FIIs reduced positions in India,” he said.

He added, however, that those pressures have now eased. “Valuations are more comfortable, the rupee is relatively stable, and things look broadly okay from an FII standpoint, while domestic flows continue to be strong.”

4. Volatility

The fourth area of caution, Mistry said, relates to how markets have become more volatile around equilibrium. “Post-COVID, you are seeing markets react in a way where when things are great, people are extremely optimistic, and when things go bad, people get completely despondent,” he said. He noted that there is a lot of information flowing around but not enough insight, and that is causing volatility around the mean.

He also cautioned that most investors in today’s market have only seen one major upcycle and may be carrying unrealistic expectations. “The Indian markets opened up in 1992. Till 2020, there were around 15 million active Demat accounts, and post that, 65 million new accounts have opened. So, the vast majority of investors have seen only one upward-trending cycle,” he said.

Mistry added that investors should align return expectations with long-term fundamentals. “Over a five- or ten-year rolling period, earnings growth and share price growth have always aligned. Corporate earnings in India have historically grown at 11–12%, and that’s what the market has delivered over the long term.”

Overall, Mistry said investors must not mistake the post-COVID rally for the new normal. “The experience between COVID and September 2024 was driven by liquidity, earnings rebound, and easy policy conditions and that is not the new normal,” he added.