VUCA World Reality: Growth intact, but valuations look stretched

We are in a typical VUCA (Volatile, Uncertain, Complex, Ambiguous) world. AI-led technological disruptions are impacting the world like never before.

The long-term consequences of this technological disruptions will be profound. In the short-term, one man – the US president Donald Trump – is disrupting geopolitics and global trade in an unprecedented manner.

Investors have to wade through this VUCA world cautiously. Investment decisions have to adjust to the evolving outlook, which is fast changing.

Trump Tariff Impact

The unfair, unreasonable, unjustified 50 percent tariffs imposed on India will impact India’s exports to the US. Since exports of labor-intensive goods like textiles, gems and jewelery and leather products will be impacted; there will be loss of jobs, too.

However, India’s GDP growth is unlikely to be significantly impacted since India is a domestic-consumption driven economy with exports to the US accounting for only 2 percent of GDP. Since exports like pharmaceuticals and electronics are tariff-exempted, the net exports to the US will be only about 1.4 percent of India’s GDP.

Therefore, the impact on India’s growth will only marginal. India will continue to grow around 6 percent, retaining its status as the world’s fastest growing large economy.

Reforms in Fast Forward Mode

India’s focus now is to convert the present crisis into opportunity by accelerating reforms to push up growth. The proposed GST rationalization, if implemented without delay, can significantly boost demand starting with the festival season.

The proposed abolition of the 28 percent and 12 percent GST rates and moving many goods and services to lower rate slabs, apart from rationalizing the GST regime will help in significantly boosting consumption demand. Along with the tax cuts provided in the Budget and the monetary easing being implemented by the MPC, the proposed GST rationalization is, indeed, a major reform initiative.

Expect Moderate Returns in the Near-term

Growth is likely to pick up staring with Q2 FY26. The likely outcome for FY26 is GDP growth of 6.2 percent and corporate earnings growth of 8 to 10 percent.

Therefore, the return expectations have to be moderate. The bull run of the last five years delivered excellent returns to investors. During the five-year period ranging from 5th January 2020 to 31st July 2025, the BSE 500 delivered 16.9 percent return.

The mid and smallcaps outperformed with 23 to 25 percent return. These high returns delivered by the mid and smallcaps have been attracting sustained money flows into these segments, pushing their valuations into unjustifiable territory.

Beware of valuations

In the short run, the market can turn irrational and continue to remain irrational for some time. But, in the long run, valuations will revert to the mean. This is a lesson from history.

Therefore, investors have to give due weightage to valuations in their investment decisions. Nifty at 24500 is trading at a PE of about 21 – one of the highest valuations in the world.

The midcap segment has strong tailwind of growth, partly justifying the valuations. But smallcaps are excessively valued. Therefore, investors have to be cautious in investing in the overvalued segment.

Growth stocks like digital platform companies will continue to attract investors despite their high valuations. Smallcaps, driven by liquidity, are excessively valued. Investors should consider these facts while investing.

First published in The Economic Times

VUCA