Prosperity Discovery Fund - FY26 Update

Dear Investors,

Greetings from Prosperity Wealth Management. We hope you are doing well.

As we navigate a period of global uncertainty, we would like to share our perspective on the markets, the evolving geopolitical landscape, our current portfolio positioning, and the path forward.

Indian equity markets have remained in the negative territory for over 18 months. From their peak in September 2024, when the Nifty 50 crossed the 26,000 mark and the Nifty Smallcap index surpassed 18,500, the indices have since corrected by approximately 6% (Nifty 50) and 17% (Nifty Smallcap) respectively.

While the headline index numbers suggest a moderate correction of 5–20%, our analysis of the top 1,500 Indian stocks by size (i.e., companies with a market capitalisation above ₹1,000 crore) reveals a far deeper drawdown beneath the surface. Nearly 9.1% of these 1500 stocks have declined by more than 50% from their 52-week highs, while 62% have corrected between 20% and 50%. In aggregate, 70.8% of the broader market has fallen by more than 20% over the last 12 months, underscoring that this is a broad-based market correction rather than a company / industry specific phenomenon.

The above analysis represents what is typical of a bear market and marks one of the most crucial periods that tests an investor’s patience and primes them for long-term investing success. 

In India, bear markets—typically defined as declines of 20% or more from peak to trough—have historically lasted anywhere from a few months to a little over 2 years, depending on the underlying trigger. During the 2008 global financial crisis, the BSE Sensex declined for roughly nine months following the collapse of Lehman Brothers, before beginning its recovery. The 2010–2013 slowdown proved more prolonged, lasting slightly over two years before markets regained momentum. In contrast, the 2020 crash triggered by the COVID-19 pandemic was sharp but brief, with markets falling steeply in just two months, followed by a swift rebound. Similarly, the 2022 correction—driven by aggressive global rate hikes and geopolitical tensions—lasted around six months before recovery set in.

Historically, panic-driven bear markets tend to be shorter and more abrupt, while structurally driven economic / geopolitical downturns usually last longer and unfold more gradually. Importantly, recoveries often begin a little before economic data visibly improves, as markets typically anticipate the turnaround in advance.

The Indian equity rally that peaked in late 2024 was partly driven by optimism around the return of Donald Trump to the U.S. presidency, which was initially seen as a positive for global markets. However, this optimism was short-lived as the announcement of reciprocal tariffs by the U.S. in early April 2025 sparked volatility in Indian equities, leading to sharp downward pressure on benchmark indices. Heightened conflict between Russia and Ukraine, and a failure to secure a durable peace, kept global risk sentiment subdued throughout 2025, weighing on emerging market flows. Domestically, the launch of Operation Sindoor in May 2025, triggered short-term market jitters leading to a further exodus of foreign capital after the event. In August 2025, additional U.S. tariffs tied to India’s Russian oil imports took effect—bringing total levies on Indian exports to around 50 per cent—further dampening market confidence and contributing to a weakening rupee and continued foreign portfolio outflows.

Over this 18-month period, sustained foreign selling, amounting to significant net FPI outflows of 5.31 lakh Crores alongside a weakening rupee, dampened returns for investors and amplified volatility. The Domestic institutions however showed confidence and bought equities in record quantities totaling to 10.81 lakh Crores through this period. The Indian retail & small investors also sold large quantities amounting to 5.5 Lakh crores. The FII holdings of the Indian stock market has come down to roughly 15% which is the lowest it has been in over a decade. The remaining rests with the promoters, Indian institutions, governmental entities and retailers. 

As we write this update, global headlines remain dominated by the recent US-Israel-Iran conflict. Indian markets along with markets globally are experiencing volatility, due to averse geopolitical sentiments as one may expect. 

The US–Israel–Iran tensions have pushed crude oil prices higher. For India, every $1 increase in crude raises the import bill by approximately $1.5  billion slightly widening the current account deficit.  While Iran itself is not a significant direct trade partner for India and contributes only about 3% of global oil output, its strategic position along the Strait of Hormuz — a narrow 21-mile waterway through which nearly 50% of Indian oil is imported magnifies market sensitivity. That said, we do not expect a prolonged conflict akin to Russia–Ukraine, given the limited military / monetary scope for sustained escalation. The volatility appears temporary. 

More Importantly, these external developments and geopolitical events do not materially alter the fundamental strengths of our portfolio companies which continue to thrive owing to the domestic market demand. They continue to execute well, grow earnings, and compound value — as reflected in the table below. While their prices may not currently reflect this growth, they are positioned to re-bound meaningfully once the overall markets turn sanguine. 

  Table footnotes:

1. Projections based on conference calls with promoters / top management (Q3FY26) and their commentary on capacity additions and commercialisation of various initiatives. In addition to our assessment of their capability of achieving the same.

2. Capital Adequacy Ratio (CAR) taken for banks and NBFCs as Debt / Equity would not be the ideal metric to assess leverage.

3. The growth rate of the engineering goods business is considered as this is the main value driver of the investment once listed separately. 

4. The growth rate of the alternate assets business is considered as this is the main value driver of the investment once listed separately. 

From the table above, it is evident that our portfolio is well diversified across multiple sectors, with no single holding representing a concentration that could pose a material risk to the overall portfolio. The companies we own are attractively valued relative to their growth potential and maintain strong balance sheets with a high degree of solvency. Exposure to Iran, Israel, or the Middle East in general is negligible. We remain overweight on India’s long-term growth story, with significant allocations to manufacturing, infrastructure, credit demand, FMCG, automobiles and auto ancillaries, healthcare and pharmaceuticals, and renewables, which together form the core of our portfolio. While defence and aerospace continue to benefit from strong sectoral tailwinds, current valuations remain prohibitively high. We will consider adding exposure if more attractive opportunities arise.

We remain underweight on commoditised, government dependent sectors. The IT sector continues to wrestle with technological disruption and we remain underweight here. Advanced generative AI engines such as Claude Sonnet and ChatGPT-5.3-Codex are increasingly automating coding, testing, data analysis, and documentation tasks — areas that historically formed the backbone of Indian IT services revenue. As global enterprises adopt these tools, traditional time-based billing and offshore delivery models may evolve. The labour-cost arbitrage that built industry leaders such as TCS, Infosys, and HCL would gradually diminish in importance.

We continue to carefully study emerging trends such as the GLP-1 value chain, data centers and cooling technology,  Indigenous defence advancements, Agentic AI, energy transition and decarbonisation, robotics and precision manufacturing, genomics and personalised medicine to potentially unlock out-sized returns. 

While geopolitical tensions, trade realignments, and technological shifts are reshaping the global landscape, we remain firmly focused on identifying businesses that are resilient, adaptable, and positioned to benefit from long-term structural change. India’s importance as a fast-growing economy and a reliable business partner is increasingly recognized globally, as evidenced by the recent UK FTA, EU trade deal and the rollback of American tariffs on Indian goods. India also continues to maintain constructive and balanced relationships with major global powers, positioning it well in an evolving multipolar world.

While bearish sentiment understandably tests our patience, we remain more resilient and optimistic than ever—grounded in a fundamental understanding of the businesses we own and their ability to create meaningful value when broader market conditions turn more buoyant. As always, we remain committed to carefully monitoring and tracking market developments while staying disciplined in our investment approach.

Kind Regards, 

Vasudev Gupta, 

MD, Prosperity Wealth Management.