We’ve been through the turmoil of the first quarter of 2025, buoyed by the enormous patience of our clients in an extremely difficult market. But as we still grapple in the trenches of the drawdown, our clients want to know—what happens next?

Our strategies witnessed one of the worst drawdowns in 2025 since our inception in 2019. Over the past three months, we’ve taken the opportunity to dive deeper into our strategies and research to devise a game plan for what comes next. The shock and awe of Donald Trump’s announcements have subsided—26% tariffs were imposed on India and are now lifted, at least for the next 90 days. Meanwhile, the trade war between China and the U.S. continues in full swing, with both countries imposing 125% reciprocal tariffs on each other.

The RBI has turned dovish and delivered a rate cut. Several factors give us confidence in the resilience of the equity markets, and we are comfortable with the level of risk in our strategies. However, we do expect near-term volatility. Our game plan is to identify stocks that can deliver alpha even in turbulent markets. Our historical analysis reinforces that this is possible with a focus on the right set of factors.

If there’s one word to define the current macroeconomic landscape, it’s uncertainty—and recent events have shown that no amount of data can predict what Donald Trump might do next. In such an environment, the best way to generate returns is to ensure resilience in stock selection and focus on finding companies with strong financials, positive future expectations, and momentum backed by price strength.

Let’s now unravel how we are planning to invest in these times of uncertainty.

Step 1 - Understanding the Pitfalls to Avoid.

Illiquidity

In an environment where large macroeconomic news can trigger investor panic, a stock with low liquidity can be severely impacted. While strong businesses may recover over time, illiquid stocks tend to see significant volatility during turbulent periods. If you look at the recent times the returns of the top 20% most illiquid stocks have underperformed sharply in the recent correction compared to the top 20% most liquid names.

To measure illiquidity, we use the Illiquidity Ratio, which calculates the average price impact of trading a stock. It is defined as the daily absolute return divided by the dollar trading volume. A higher value indicates that even small trades can significantly move the stock price—implying higher risk in volatile markets. We also examine the ratio of monthly trading volume to total outstanding shares. Stocks with excessively high turnover can be prone to speculative activity and sharp price swings, especially in stressed conditions.

Risk & Financial Distress

Volatile times are typically not favourable for stocks that have very high volatility or financial distress flags. In the last three months we saw the stocks with the highest volatility lag the low volatility stocks in performance and the same was seen among stocks with high financial distress.

Various financial metrics combine stock return volatility, profitability, leverage, size, and valuation to dynamically assess risk. Like the distress measure that combines market and financial data, making it highly responsive to recent developments. We also look at scores that generate a bankruptcy probability. It's useful for flagging balance sheet weaknesses that may not be obvious at first glance.

Leverage

Highly leveraged companies tend to struggle the most when credit markets tighten or when the macro environment becomes uncertain. In such scenarios, the cost of debt goes up, access to capital becomes harder, and companies with heavy interest burdens can quickly spiral into distress. The same effect was seen in the market in the first quarter of 2025.

We assess a company’s overall debt profile and its ability to comfortably service financial obligations, especially in an environment where interest rates are high and credit is tight. In the current market, we’ve seen that companies with elevated debt levels and limited operating buffers are the first to face pressure—from rising refinancing costs to strained margins.

The recent liquidity crunch across segments has only reinforced this view. When equity markets turn volatile and credit markets become cautious, even a small disruption in earnings can create a disproportionate impact on highly geared companies. We prefer to avoid such exposures unless there is clear evidence of strong and stable cash generation, prudent capital allocation, and the ability to navigate volatility without resorting to excessive borrowing.

Overvaluation

Cheap is not always good. Some companies may appear attractive on traditional valuation metrics like low P/E or high earnings yield, but that can sometimes be a trap. These stocks may be cheap for a reason—poor future growth prospects, earnings deterioration, or hidden balance sheet risks. So instead of absolute numbers we look at 5-year relative valuation ratios such as earnings-to-price, sales-to-price, and free cash flow-to-price in comparison to their own historical range. A company trading significantly cheaper than its historical average without a strong business justification could signal deteriorating fundamentals.

We also examine industry-relative valuation: comparing a stock's valuation to its peers in the same sector. If a stock trades at a steep discount to its industry group, it could be because of weak execution, falling market share, or structural challenges in its business model. In other words, just being the cheapest in a sector doesn’t make a stock investable—it could mean it’s the one investors are most worried about.

Step 2 - Finding the Right Factors to Focus On

We studied the performance of various factors during the last trade war and the factor performance matches intuition very closely. We see that a strategy that is a combination of quality, forward looking expectations and momentum would have given a 25% CAGR in a market when the Nifty itself gave a 8.8% CAGR and high momentum, high beta stocks actually underperformed. So in the present scenario our focus continues to remain on these factors - quality, strong forward looking expectations and momentum.

Let’s try to understand these factors and why they are important in the current scenario.

Capital Efficiency

Bear markets reward companies that can generate more value with less capital—those that run lean, scale efficiently, and deliver consistently on profitability. These are businesses that don’t just grow for the sake of growth, but do so while maintaining discipline in how they deploy their resources.

In today’s climate of tighter liquidity and cautious sentiment, we place a premium on operational efficiency and prudent capital allocation. Firms that can reinvest intelligently, manage their cost structures tightly, and deliver sustainable earnings without overextending themselves are better positioned to survive—and even thrive—when the broader market struggles.

These are the names that tend to hold their ground during corrections and outperform when the cycle turns.

Earnings Momentum & Market Expectations

In today’s market, where sentiment can swing sharply on the back of geopolitical developments, earnings misses, or even central bank commentary, expectations often drive stock performance more than reported results. Fundamentally sound businesses can see their stock prices falter if the market loses confidence in their future prospects, even briefly.

That’s why one has to pay close attention to how market expectations are evolving. We assess whether the outlook for a company is improving or deteriorating, how confident analysts are about upcoming results, and how the broader market is positioned. Companies that show signs of improving sentiment, rising institutional conviction, and stable forward estimates tend to do well—especially in risk-averse or volatile conditions where investors reward visibility and consistency over excitement.

This forward-looking lens helps us identify stocks where the market is quietly getting more optimistic—giving us a valuable edge before that optimism is fully reflected in price.

Price Momentum

Momentum has always been one of the most enduring factors in investing. Across market cycles and asset classes, stocks that perform well tend to continue doing so—especially when that strength is backed by institutional flows and underlying fundamentals. In uncertain environments like today, where narratives shift quickly and investors crave clarity, momentum becomes even more powerful as it reflects what the market is rewarding in real time.

We use a layered framework to evaluate momentum, drawing from different time horizons and adding filters to avoid false signals. We don’t just chase price action—we look for sustainable trends that reflect confidence, consistency, and confirmation from smart money.

Momentum, when aligned with quality and risk controls, helps us stay in sync with what’s working in the market—making it a cornerstone of our approach, not a tactical overlay.

How Our Portfolio Looks Now

Coming out of a difficult quarter, our portfolio today reflects a deliberate shift toward quality with a strong focus on expectations and momentum. We’ve leaned out of high-beta, speculative exposures and rotated into businesses that demonstrate staying power, even when the market is shaky.

The portfolio now has a greater concentration in:

• Capital-efficient companies with strong ROE and robust free cash flows.

• Low-leverage firms that are less vulnerable to rising interest rates and refinancing risk.

• Consistent earners—names with strong margin profiles, healthy earnings visibility, and reliable analyst support.

• Momentum leaders that are not just outperforming but doing so with low volatility and rising institutional interest.

At the same time, we’ve reduced exposure to:

• Overvalued stocks that might look optically cheap but fail our quality and distress filters.

• High operating leverage businesses that could see margin compression in a volatile demand environment.

While we continue to maintain factor diversification, the tilt is now clearly toward Quality, Low Risk, and Trend Persistence.

Conclusion: A Steady Hand in Choppy Waters

This strategy isn’t just built on backtests—it’s grounded in lived experience. Over the years, we’ve navigated through multiple turbulent episodes—trade wars, global health crises, monetary tightening, and political shocks—and the lesson remains the same: it’s not the flashiest or fastest-growing companies that survive, but the most consistent, financially sound, and well-managed ones, specially in the bear markets.

Through our analysis and real-time learnings, we’ve found that resilience in portfolio construction comes from focusing on businesses that combine Quality (stable earnings, strong capital allocation, and governance), Low Risk (defensive financials, low volatility, and solid balance sheets), and Momentum (clear institutional interest and positive price trends).

By deliberately avoiding financial and operational minefields—companies that look optically cheap or exciting but hide risks beneath the surface—we aim to reduce portfolio fragility. In markets like these, capital preservation is half the battle. But that doesn’t mean we’re standing still; we’re positioning for opportunities that arise out of dislocation.

As we look ahead in 2025, our focus remains unwavering: rigorous research, disciplined execution, and transparency in every step we take. We thank our clients for their continued trust and support—and we move forward with confidence, clarity, and conviction.