After a very strong first quarter, equity markets corrected during the month, with the Nifty down 0.9% for the month. Our portfolios continued to do relatively better than the market. The correction in the market was triggered by continued government uncertainty over taxation of foreign investors’ investment gains, and a general sense of negativity surrounding governance in India.
The economic climate in India seems fairly grim and the popular media has been taking a severe view on the same. The primary factor behind this view is the perceived slowdown in governance. With the likes of IMF and S&P starting to quote this as a problem area for India’s economic development, this issue is becoming more serious. In addition, the uncertainty over taxation of foreign investors is causing a pause in foreign investment flows. This coupled with the high current account deficit has had an impact on the rupee which has weakened considerably over the past few weeks. Given that the RBI has been on a rate increase cycle for some time now, interest rates in India are near their 3 year highs. The capital goods cycle in India is also very weak, with most large scale investment decisions slowing down considerably from their peak levels. In sum, there appear to be very few positives in the economic climate.
From our perspective, one of the significant positives in favor of India is the positive consumer sentiment. Despite all the talk about the government, the average consumer is earning more each year and continues to be in a strong buying cycle. Many of the consumer goods companies we follow are seeing some of their best years. Despite interest rates being at a 3 year high, consumer purchase patterns continue to hold up. One of the reasons for this is that the Indian consumer is much less indebted than his Western counterpart and also has a high savings rate. With inflation showing signs of cooling, the RBI in its latest monetary policy cut the repo rate (the rate at which banks borrow from the RBI) by 50 basis points and signaled a reversal in its prior tightening policy stance. Given the positive consumer sentiment, there is significant pent up demand which is likely to emerge as and when interest rates head lower. Several people have delayed the purchase of a car or their dream home, and are likely to move ahead with their purchase decision soon. This is in sharp contrast with the developed markets, where consumers continue to struggle with over-indebtedness and high unemployment. Companies in India, with their prospects linked to the Indian consumer, have been delivering fairly strong results.
For us, as investors, the macro is just one part of the story. To us, the biggest determinant of future returns from our stock portfolio is the valuation at which we buy these stocks. The pessimism that seems all pervasive at present is perhaps creating the ideal environment in which to pick stocks. The Nifty has been here or hereabout for more than 4 years now and in the meantime although growth has slowed over these 4 years, it is still a reasonably high positive number. That implies that valuations have got crunched and while it is difficult to predict market returns over the short term, it is our expectation that investors in India should achieve reasonably satisfactory returns in the coming years.