2025: Year End Notes

02 January 2026

As we close 2025, it is a good time to pause and reflect.

I am reminded of an incident from 2005. After returning to the office following an offshore campaign, I met the division head at the pantry. Part of our campaign had not gone as planned, so I expected disappointment from him. Instead, he simply said, “That’s fine. If you don’t face problems, you don’t learn.”

That lesson stayed with me. Challenges, when approached correctly, are opportunities to learn and improve. The market environment in 2025 offered a similar opportunity - to understand what did not work, to reflect, and to recalibrate.

Looking Back at 2025

The year 2025 marked a defining moment for India’s economy, as the country overtook Japan in nominal GDP. Beyond the headline milestone, it signalled the depth of India’s economic expansion and rising global economic influence.

The year brought multiple headwinds, few listed below:

  • Global economic slowdown and sharp tariff actions by the US

  • Despite strong public capex, private sector capex remained selective and many companies waited for clearer demand signals. PE/VC funding slowed due to valuation resets and global risk aversion.

  • Foreign capital outflows leading to rupee depreciation

  • Geopolitical conflicts at borders

  • Supply constraints in critical materials such as rare earths

At the same time, there were meaningful positives as well:

  • Simplification of the GST tax structure and income tax reduction to boost domestic consumption. 

  • India signed trade agreements with the UK, New Zealand and Oman. Trade deals are progressing with the US and EU.    

  • Government push for manufacturing through PLI schemes.    

  • RBI rate cuts aimed at supporting growth.    

  • Sustained investment in infrastructure.    

  • India added a record ~44.5 GW of green energy capacity in 2025, reducing dependence on fossil fuels.

The Indian stock market in 2025 was marked by volatility, divergence, and a shift from broad based gains to stock specific performance. After a strong run in previous years, markets struggled with elevated valuations, slowing earnings growth, and persistent global uncertainties. Foreign investors turned cautious amid tight global financial conditions, leading to intermittent outflows and pressure on the rupee. While headline indices showed resilience, actual investor experience varied widely with several stocks corrected 50-70% from peak.

At the same time, domestic structural strengths provided a stabilising counterbalance. Strong retail participation via SIPs, steady domestic institutional flows, and continued government led capital expenditure helped limit deeper corrections. Sectors linked to manufacturing, infrastructure, defence, and renewable energy attracted long term interest.

Overall, 2025 was less about easy returns and more about investing process, discipline, risk management, valuation sensitivity, and patience rather than momentum driven investing. We learned a few lessons during this period, which will be used to improve our investing process.

A Needed Reality Check

The post-COVID rally delivered strong returns until last year, creating a belief that markets move only in one direction and that any company with a growth narrative, irrespective of valuation, would eventually make money.

2025 challenged that assumption.

Several smaller companies corrected more than 50% from their peaks, and some market darlings with compelling stories, such as Gensol Engineering, ended in bankruptcy. These episodes reinforced an old truth: stories do not protect capital; cash flows do.

Markets behave like pendulums. In periods of optimism, they swing to one extreme; during pessimism, they swing to the other. Corrections, while uncomfortable, are healthy, as they restore balance and discipline.

We have seen this is not a bear market with sharp recovery like in 2020. How long this grinding bear market will take to recover, only time will tell.

In such phases, markets stop rewarding narratives and begin rewarding:

  • Earnings growth

  • Business quality    

  • Financial discipline

The Investor’s Edge

We believe investors should always focus on:

  • Businesses with clear opportunity size and growth visibility

  • Capable and ethical management, with good capital allocation record

  • Healthy cash flows

  • Valuations that offer a margin of safety

Short-term price movements are largely noise. Investors who stay focused on underlying fundamental and operational performance and remain invested through market cycles with a long term mindset, are the ones who build long term wealth.

What to Expect in 2026

We do not know how AI stocks, gold, silver, copper, or other commodities will behave in the near term. What we do know is that over time, valuations eventually align with cash flows and asset utility.

India will continue to focus on Electronics manufacturing, Semiconductors, Battery energy storage systems (BESS), Renewable energy & Manufacturing in general. However, we may not have good investment opportunities in these businesses due to extremely high valuations.

That said, we remain confident that India will continue to grow despite a global slowdown, supported by:

  • Robust domestic consumption - GST restructuring and reduced income tax rates will help    

  • Lower interest rate supporting borrowing by consumers and capex by corporates.    

  • Government manufacturing initiatives and infrastructure spending.    

  • Lower energy costs and rising renewable capacity.

As India grows, we will continue to have opportunities available to invest in quality businesses.

Closing Thoughts

I will conclude this letter with a principle we often repeat and shared in last year’s note as well:

We focus on what we can control:    

  • Investing in businesses with large market opportunities, quality management, strong cash flows, and attractive valuations.    

  • Keeping emotions out of investing and stay invested through volatility and uncertainty with the objective of long term wealth creation.

Managing emotions is one of the most challenging aspects of investing, which is why a disciplined investing process is essential.

Markets will test patience from time to time. Discipline and perspective are what carry investors through.