Indian Stocks Face "Negligible Returns" Cycle, Says Shankar Sharma
Investor Shankar Sharma attributes the Indian Nifty's 18% fall from its January 2026 peak to a post-boom "lake of returns", urging a shift to fixed income.
Nifty's Decline and Return Cycle
The Indian Nifty index has seen significant declines, dropping 18% from its record high of 26,373.20 set on 5 January this year. Over the past two years, the index delivered a negative return of 13%, and is down 14% year-to-date. Ace investor Shankar Sharma, founder of GQuant Investech, attributes this performance to his "lake of returns" theory.
This theory posits that periods of strong market performance are inevitably followed by a cycle of negligible returns. Sharma stated in 2024 that main indexes would yield "below par" dollar returns for several years, a forecast he believes is now unfolding.
Large Firms' Inward Focus
Sharma dismisses conventional explanations for the market's struggles, such as foreign capital outflows or geopolitical risks, as "convenient reasons". He contends the core issue stems from large Indian corporations' inward-looking focus on the domestic consumer market. These companies, he argues, have not sufficiently pursued innovation or global expansion.
As an example, Sharma noted the difficulty in finding Indian electric vehicles for sale in Dubai, highlighting a lack of international presence. He suggests this domestic focus has limited profitable growth opportunities, especially for sectors like banking, which comprise 40% of main indexes.
Smaller Companies Drive Innovation
Conversely, Sharma has expressed optimism for smaller Indian companies, a position he has held since March this year. He observed that these firms are demonstrating greater innovation and a stronger focus on international business compared to their larger counterparts.
This "creative destruction", as he describes it, will likely lead to an erosion of market value for large companies while smaller, more agile businesses gain. Sharma advises companies he works with to prioritise international expansion and innovation, anticipating a continued shift in market capitalisation towards these smaller entities.
Alternatives for Retail Investors
For retail investors, Sharma warns that mutual fund investments may not yield substantial returns after accounting for taxes and risks. He suggests that for domestic retail investors, preserving capital is often more critical than achieving high returns, a goal equity markets do not reliably promise.
Given the Nifty's negative returns over the past two years, small investors face real-term losses of 20-30%, which he deems intolerable. Sharma recommends exploring alternative investments such as fixed income, gold, and specific real estate opportunities.
This perspective suggests Indian investors should reconsider traditional equity allocations, particularly in large-cap funds. The anticipated shift in market capitalisation towards smaller, innovation-focused companies implies a need for deeper due diligence beyond benchmark indexes.
For Asian businesses, Sharma's critique of an inward-looking corporate culture serves as a caution against relying solely on domestic consumer growth, pointing to the necessity of global strategy and product innovation to sustain long-term profitability.
This article is journalism, not investment advice; consult a licensed professional before making financial decisions. Market data is indicative, may be delayed, and should be verified with your broker or exchange before use.
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