February 2010: Hungry companies with a track record

After a sharp 6.1% fall in the month of January 2010, equity markets finished the current month with an up move of 0.8%. Equity markets, though finishing the month on a positive move on the back of the optimistic budget, was plagued for significant part of the month by negative global economic news. Our portfolio broadly has done relatively well, but no major move on the positive side.

The budget presented on Feb 26 is reasonably balanced. The budget continued its initiative on social sector and infrastructure spending. Roll back of tax stimulus measures was done to some extent, keeping in line with the partial and calibrated roll back measures promised earlier. Fiscal deficit is being brought under control to some extent, partly with help from divestments and 3G auction. The changes in the tax rates also needs to be viewed in light of the move towards the new direct tax code and GST regime starting next year. It looks like the new tax code in its current form would get implemented next year. If so, do keep an eye open on developments as investors could be forced to take some serious action in the next financial year to ease their transition to the next tax code.

Concerns about the developed economies’ macroeconomic condition continue to haunt capital markets across the world. Most of the people I know or companies we invest with will be able to tell you the size of their borrowing very quickly. Recently, it was found that a country as large as Greece could not exactly tell what their total borrowing has been. These are scary thoughts. Worse still is the fear that there is never just one cockroach in a kitchen.

Many countries are starting to find that the bond markets are not too keen to finance their mammoth government borrowing programs. If this problem continues, there is a very serious risk of a liquidity tightening across the world. Many experts believe the process of tightening has already started. Foreign investors appetite for Indian markets could diminish in such an event. In such an event, the Indian economy too will get affected and it would be highly unlikely that the Indian government can achieve the divestment target for next year or the budget deficit target of 5.5% of GDP.

As for equity markets, we are not yet finding wide spread attractive investment opportunities. We are monitoring several companies that have the profile similar to Sachin Tendulkar. After almost 20 years of international cricket, his appetite for scoring runs and his recent track record is spectacular. We also like to invest in companies that have been doing well for several years and have not lost their appetite for doing well in the future. There are several such companies and the India economic growth should ensure that the prospects for these companies in the coming years would be good. On the other hand, because of the sharp increase in stock prices over the past year, we are not yet finding these companies at prices where one can take large portfolio positions. Knowing the nature of the equity markets, one is fairly confident that the sensible prices will come soon.