The Wartime Economy and Rough TimesThe Wartime Economy and Rough Times

First, a note on performance:

Momentum has been having a really really rough time recently. There are two layers to it - that it has had negative returns for the last year. And that the index in the same time has been positive. This creates the fear of: has momentum stopped working? We have been looking at it in different ways, in terms of looking at what has triggered the worst performance and why the gap is larger.

Two things to our analysis, but first, the actions we are taking. We will of course be changing course through tweaks to the algorithm, and we do this all the time after proper backtests. The core strategy of momentum, in that we buy stocks that are strongly trending upwards in price, remains as is - the smaller tactics of how much to buy, when to buy, when to exit etc are the changes that remain in our hands. These changes are normal, even in good times, and we’ve done this in the past too.

In the last year, it appears that almost all momentum-oriented portfolios, including the index are down considerably. What the algorithms do that we all use - slightly different perhaps - is buy the stocks with the strongest momentum. However, in the last year, many such stocks have lost momentum very quickly after they qualify for the strongest stocks, and much of that seems news related. This choppiness causes short term losses, but importantly, it’s a characteristic of a “sideways” market. We’ve noticed this in the past, in 2022, and earlier, in 2019. Momentum does underperform in those times too - though long term returns are usually positive (but not always outperforming). We’re at a time - very rare - when not just one but even three year returns, though reasonably positive at 15% a year - we are still underperforming the index by about 1-2%.

In our experience such a time is temporary and has been seen for periods in the past. While the three year underperformance is relatively rare, a 1 year underperformance is expected about 1/3rd of the time (roughly one in three years). Our analysis shows that while this is one of the times when the underperformance exists, but this is expected in this algorithm’s backtests and is more a feature, not a bug. It requires us to live through this period to be able to reap the benefits of a period of strong upward momentum when it comes. And it usually does come, going from the past.

I’m personally confident that momentum will return to glory in the coming year. The market doesn’t look like it, but the market doesn’t often lend itself to short term prediction meaningfully anyhow. We will of course keep a keen eye to see what we can do to enhance the stability, robustness and agility of the strategy, and try to ensure that when the markets get strong again, we do see the benefits in an asymmetrically positive way. Too often, the despair at momentum’s performance precedes a period of excellent returns in this strategy - so we wouldn’t write it off!

Surge India delivers 18%+ earnings growth

Our Surge portfolio reported median revenue growth of 19.3% YoY and median PAT growth of 18.8% YoY — ahead of the Nifty 50’s 6.2% revenue and 9.4% PAT growth, and above the NSE 500’s 10% and 13.3% respectively. This reflects broad-based strength across the portfolio. Some stocks may be dealing with short-term sentiment or valuation pressure, but business performance remains strong. We are staying with companies that are delivering — and steadily reconsidering those that aren’t.

Defence: Making a measured comeback in the portfolio

We have liked defence for a while. The government wants to build more ships, weapons, and systems at home instead of importing them. India’s defence spending grew at over 10% annually between 2022 and 2023 and now, in 2025. The recent geopolitical tensions further boosted sentiment as more orders will flow.

It’s a multi-year opportunity, and we are happy to stay invested. Beyond defence, we continue to remain bullish on financialisation, manufacturing, infrastructure, and consumption.

No Major Changes. Just small, useful tweaks.

The portfolio’s core themes remain intact. Stocks where fundamentals are breaking down are reviewed, trimmed, or replaced. If a company stops executing, we move on. If one gets better, we increase our allocation. We don’t try to time every move in the market.

Warfare economics

There’s so much happening and yet, so little of an impact on markets that it makes you wonder what’s going on. The war between India and Pakistan is not a “skirmish”, it has now become an escalated doctrine that India will strike back hard if there is terrorist activity. The social media is rife with (sometimes, very funny) memes on the whole thing, but it does seem like India is substantially stronger and capable, but it doesn’t want to push a war to a point that would totally decimate the enemy.

However, the war has brought two, and perhaps related, things to the forefront.

First, that the world doesn’t like us. The world is run on subservience to one power or another, and if you do not overly bend on any side, you’re considered untrustworthy. China is, too, for exactly the same reason, and now it’s a side of its own. Regardless, we are now being made aware - by the lack of support in the fight against a rogue state - that we cannot trust other countries who might even support an enemy against us.

Which brings me to the second point. That because we can’t trust such countries, we should reduce our dependence on them. Whether it’s oil, goods, computers, phones or anything of the sort. So at what is peace time, we must build more for ourselves. That we must, instead of importing, have more manufacturing in India, have more commerce within the country and grow our market, rather than focus on exports or imports.

The obvious areas of interest are defence goods, but downstream it will be the ancillaries who make the machines, or raw materials, that go into making those goods. It will mean more consumer goods as these companies expand and increase their workforce. It will mean an economy that focuses on innovation rather than just importing something and selling it.

We have a podcast on this soon, but what this should do is to push our economy forward a little more. Incremental defense spending will create downstream impact that might be as much as 2% of GDP a year, with the subtle impact of increasing home-grown manufacturing.

A lot of what is really defence based expenditure results in research that builds into civilian use eventually. The internet started from a defence project in the US. Cryptography was a defence initiative. The idea of launching satellites into space that can provide guidance information to people on the ground wasn’t to help the likes of Uber or Swiggy, it was to help armed forces communicate and visualise. Eventually, these made their way to what we now take for granted. India too will have to go down this route - and it will have to work with local companies and universities which will eventually take us even further.

On the other hand, the US, Europe and Japan are facing stress in their bond markets. Japanese 40 year bonds have crossed 3% in yields, and American 30 year bonds are above 5%. These bonds have lost their traditional investors, while the country runs massive fiscal deficits and has to issue more and more bonds. Add to this the fact that a certain president wakes up on the wrong side of the bed and voila, some other country has 50% tariffs. This will continue to hurt the world bond markets, which are typically a sign for a sell off in equity markets eventually.

However, such an equity sell off is now politically and economically unpalatable, so I expect the western central banks to do what they’ve always done when the feathers are ruffled: cut interest rates and announce QE again. Regardless, during this time, countries like India (and to some extent, China) are likely to be more resilient simply because they are less dependent on worldwide flows and have large domestic economies, and I expect that the damage will be relatively small. But what this means is: for a short period of time, the uncertainty and volatility is likely to continue.

These things, though, are blips in the journey. We don’t stop living because it’s too cold, or too rainy, or too hot, or other such events. Because we know that it doesn’t stay that way for too long, and you just have to weather the storms. Investing is like that, except someone’s shouting in your ear all the time: it’s raining, it’s too hot, it’s too cold, why don’t you just quit? The shouting appears on video channels, on whatsapp, and in the circle of people on twitter who sold everything 1 year ago because they knew and when the markets go up, they have also managed to buy just before it did. Society is sometimes the menace you have to smile through, because no matter what happens, there’s always enough people who believe the sky will fall on our heads. But somehow, regardless of how bad things get, things get better.

In the world of investing, it pays to ignore the noise. That times are rough is the truth, but if things weren’t rough every once in a while, we wouldn’t enjoy the good times quite as much. And in the bad times, the greatest companies evolve in the markets. The best managers don’t necessarily find them at their bottom, but they ride them as they progress upwards. Our job, as caretakers of money, is to work towards a better tomorrow by finding the winners, through different mechanisms perhaps, but the goal is still that: to win at the markets, so you can win at life.

To better days ahead,

Deepak