The month finished off on a positive note, more due to a pull back from the extreme weakness seen over the past few months rather than any major fundamental positive change in economic conditions. After almost 6 months, foreign investors invested money inIndia, rather than pulling money out. Typically, after such extreme sell offs, correction in markets are led by the short sellers calling it a day.
The financial year closed as one of the weakest in history. To give it a perspective, the US markets, over the past 180 years, has seen a fall of 40% in financial year or greater only 3 times including the current year – the prior 2 observations near the great depression of the 1930s. Indian markets also witnessed one of the weakest closings in history. As a result, what one sees is akin a to 50% sale that one often sees in your local bookshop around the corner. The prices at which companies are available today is approximately half of what they were available last year. As in the local bookshop sale, you may not want to buy all the books that are on sale, but some good books that you always to buy during the sale can be picked up now at good discounts. There are several durable and well run businesses that are being offered at good prices.
Having said that, business conditions remain tough and will continue to remain tough for some time to come. Corporate results for the current quarter will be dismal for several pockets of companies – like automobiles, real estate, construction, metals, etc. The current economic weakness is likely to force down the ambitions of several entrepreneurs and in some cases, the risk of bankruptcy is quite high. Skeletons, that are easy to hide during a bull market, will come out in a bear market. Having said that, the permanent damage will happen only to a few companies, and there are several other companies that come out stronger from this economic corrective phase. From the portfolio perspective, we believe over 80% of the companies in the portfolio should deliver reasonably good performance.
This single positive ray of hope in all this aura of negativity is the rapidly falling inflation and the resultant drop in interest rates. As commodity prices fall further, and rupee appreciates a bit more, a more precipitous fall in inflation seems likely. Such conditions give the government lot more tools to give the economy a boost. Unlike several other nations that are taking up large scale stimulus programs, the Indian government approach is smaller and targeted programs. At the heart of the efforts seems to be the focus on home loan rates.
Asset prices are also intricately linked the interest rates in the system. In the process of valuing a company, the same company will be worth lot less when risk free rate is 10% compared with a time when the risk free rate is 5%. We believe a sharp fall in interest rates should improve the gap between market prices and intrinsic values of several companies. Though one may not see dramatic appreciation in stock prices in the immediate term, conditions over the next few months should throw up some good opportunities to the patient investors.