The last few months has been dominated by talk about China and the fears in relation to that. The Indian stock market continues to consolidate in a range, a situation which has prevailed for many months now. Our portfolios continue to do well.
At this point, while the Greece issue came and went, analysts and observers are more keen to talk about China and the threat it represents to the global economy. The trouble of course, is that China as an economy, continues to be fairly opaque and difficult for outsiders, and perhaps even insiders, to decipher. The Chinese government says that they are growing at about 7%, the lowest in many years, but still a respectable rate. There are other observers who challenge that claim, and say that the Chinese economy is growing at a much lower rate, and point to the sharp fall-off in commodities as evidence of that. What is somewhat worrying about China is that they have accumulated a lot of debt since the crisis of 2008, to try and stimulate the economy to ward off the effects of slower export growth since 2008. The latest evidence that something may be wrong, is the sharp fall in the Chinese stock market, despite all efforts by the Chinese government to stem the fall.
While the situation is obviously not so easy to figure out, given the opaque nature of the Chinese economy, one can clearly say that over the long run, India stands to benefit from the fall in commodity prices, which is a direct result of the slowdown in the Chinese economy. The reason for that is that India is a large importer of commodities, and a falling price of oil, coal, steel, etc are positive for the Indian economy at large. The fall in the price of gold is particularly relevant, because a lot of Indian savings were being channeled into gold, which from an economy’s point of view, is essentially, money lying idle, simply seeking protection from inflation at best, and non-productive speculation, at worst. With gold now down for 4 years in dollar terms, India should benefit from a lower allocation to gold which is a natural result of an asset class underperforming. We have already discussed in earlier newsletters about the positive impact of a falling oil price.
That said, one can not rule out a negative impact of what is happening in China on all global equity markets – and should the situation spin out of control, the Indian stock market could also feel the ill effects of that. When we look at companies that are likely to be directly impacted by a possible crisis in China, the names that come to mind are obviously the commodity producers and also possibly PSU banks who may have lent to these commodity producers. The impact on other companies is likely to be more indirect, and in our opinion transitory. When we look at our own portfolio, we do not find much reason to worry, because most of the portfolio is insulated from any direct economic impact. We have always maintained that mark to market hits, which may result from events that are extraneous to the core businesses that our companies are in, are par for the course, and a patient investor should take them in his stride, in order to benefit from the rewards that accrue from investing over the long term. At the end of the day, the fortunes of our portfolio are linked to how the underlying companies perform – it appears to us, that over the medium to long term, we have every reason to be satisfied with the past and continuing performance of the underlying companies in the portfolio. So while we are not taking our eye off the ball on what is happening in China, we also know that the best results are obtained by thinking micro rather than macro.