Making sense of a drawdown is something investors are being forced to do after a very long time. After the brutal Covid drawdown of 2020, investors hardly saw a significant drawdown for five years.
The market saw a one-sided upmove with every dip getting bought, even as valuations of companies kept rising well above their long-term averages. The market brushed aside the valuation excesses as an occupational hazard caused by deployment compulsions of domestic institutions. Liquidity was seen as sustainable and mistaken as a protective shield for growing valuation excesses.
This mistaken assumption caused an IPO boom across market segments, triggered an OFS rush by global venture capitalists, and a private placement push by the corporates. Everybody tried to make the most of the liquidity, and most people got the money they wanted to raise in 2025.
But 2026 changed things too fast, as domestic monies started moving out from equities to precious metals and real estate, domestic leverage hit an all-time high, and FIIs sold very aggressively. The sellers began to outmanoeuvre buyers in various market segments, and the markets began to correct sharply in some overvalued parts. The Iran war came exactly when sellers were growing impatient. FIIs sold down aggressively, and their selling speed surprised potential domestic buyers.
Sovereign funds rushed to the exit door, moving their money out of India at a pace not experienced in years. Investors started seeing sharp drawdowns in their portfolios, even as the selling pressure was just beginning to spread.
What we are seeing now is a cascading selling effect across the broader market. This has spiked the drawdowns significantly. Investors must think beyond the drawdown and allocate capital sensibly to beaten parts of equity. Where the market reaction is overdone, the reversion from the drawdown can surprise us. That opportunity in every drawdown is too good to miss.
