Markets
After a steep fall of in June, markets rebounded in July 08. The rebound was driven by near term technical factors, rather than any major changes in fundamentals. Market fall during the first half of the year was also associated with a large number of short sellers in the market. During the month, the US government clamped down on short sellers leading to a global equity market recovery, that translated to a similar movement in India too.
Environment and Companies
High oil prices and high inflation is starting to have a serious impact on the Indian economy. The government, having passed a critical test, is determined to clamp down on inflation. The Reserve Bank continues to tighten interest rates with the sole objective of reducing inflation, even if it is at the cost of economic growth. Inflation is likely to remain high till about Nov 08 (inflation reached a bottom of 3.02% in Nov 07) and the tight environment is likely to continue till at least about that time.
The common question that everyone is interested in today is whether the market has bottomed out, or does it still carry some downside risk. With the markets having fallen significantly, the downside risk from current levels does not seem high. Having said that, it does not look like the markets are going in a hurry to go up either. We should see a few months of consolidation in the market before it starts to move up. This is also a period where focusing on individual stocks is more important than making a directional call on the overall market.
Several companies that benefited from their excesses last year seem to be getting affected in the current year. For example, we are seeing a significant number of companies showing large write offs in their foreign exchange loans. Companies with high borrowings are also likely to get affected.
This environment is also very conducive to pick up and build up investment positions in larger quality stocks that are available at attractive prices. Most of the companies in the portfolio came out very strong results. Due to a focus on cash rich companies and companies that grow through market share expansion, we saw one of the best results season for many of the portfolio stocks. Several companies grew at over 25 per cent (HDFC Bank, Sundaram Finance, CRISIL, ICRA, Infosys, Mastek, Plastiblend, Gruh Finance, Gandhi Special, IMPAL,) and results from the other portfolio companies, though not as high, was still very strong. Most of these stocks are trading at near the low end of their valuation range and we believe the market has started to throw up some interesting values. The next few months should be a good time to build up some core investment positions.