2025 still has a week left. The year has hardly been a surprise for those who have seen cycles. Actually, it has been a lot more predictable than it looked. The world has clearly taken a risk-off direction in 2025. People have veered around to commodities as a hedge against high valuation.
The precious metals trade is classic investing at its best. But, can commodities sustain their rally if the global economy weakens or if the global stock market corrects? The answer to that question lies in the extent of leverage the markets are carrying. If the leverage is still running very high, as my gut feeling tells me, then deleveraging is bound to affect all asset classes in the coming years.
It could happen as early as 2026. Or, it could take a while. That is what remains to be seen. This means that our investing has to be for the long haul. Nurturing near term angst over returns, performance and peer pressures will simply not work. They could actually hurt very badly if you are running behind the wrong objectives when safety should be your primary pursuit.
Capital preservation needs far more nuance now than it did in early 2025. This is where discipline and values are going to play a big part. If we stick to valuation discipline and stay away from frothy parts of the market, we will be safe zoned. We still need to invest in equity as an asset class. But, within equity, there are very different terrains to tread and you need to choose the right terrain. In early 2025, investors went all-in towards SMEs, microcaps, smallcaps, and midcaps. They shunned largecap as the space didn’t excite them.
But, that trade has actually not worked. The failed trades of one year may be waiting to spectacularly fail in a subsequent year. Extreme caution is the need of the hour and one does not get the feeling people respect that enough. Investors are habitually pouring money into small-caps and mid-caps, hoping that time will correct the valuation mismatch and returns will simply become a function of time. That is as symmetric and linear as a thought process.
Normally, investing cannot follow and deliver to that thinking given its own asymmetric nature. Investors are clearly smoking the pipe of recency bias and pulling too hard. Situations like these usually never end well.
A reset will always be sudden and the only unknown is the trigger. But, experience tells you that a reset always happens when you least expect it. Will there be a valuation reset in 2026 or will we slowly glide down in expensive stocks like we did in 2025? That is the only question waiting to be answered in 2026.
Having said that, strictly value- driven investing backed by better growth prospects in individual companies will work well in 2026. In that sense, 2026 may actually be a year when more opportunities can be found and better discovery of value is likely. That is the silver lining as we holiday and bid goodbye to 2025.