After a weak May, the Indian stock market rebounded very strongly in June, closing the month with a positive return of 7.2%. Our portfolios did fairly well and are now in line or slightly ahead of the market for the year to date. The strong uptrend in the market was despite continuing negative news both locally and globally.
This can sometimes surprise investors, who expect markets to move in line with the news flow. The Indian economy has slowed down significantly, the Rupee has been on a downward spiral, inflation continues to be high, government policy action continues to trail expectation and the RBI seems keen to wait for action from the government to address the fiscal situation before it considers reducing interest rates. Also, the European situation continues to remain unresolved though there were some positive sound bytes at the recent European summit. The news from the US and China is not very heartening either. In such an environment, many investors have been surprised by the strong rally that the markets have witnessed. As we have been saying over the past few months, markets have been statistically cheap. At such prices, markets are more likely to respond to favorable positive news rather than to any incremental negative news.
In this dark gloomy environment, a bright spot has been a steep drop in global oil prices. India imports a large percentage of its oil requirement and the total oil import bill was close to $ 150 billion last year, contributing significantly to our current account deficit. The current market price of oil is about 20% lower than last year. If global oil prices were to continue to fall, it can have a dramatically favorable impact on the Indian economy – lower fiscal deficit as the oil subsidy reduces, lower inflation which will give the RBI room to reduce interest rates and higher foreign investment flows which would have a favorable impact on the Rupee. We continue to watch oil prices very closely.
Is it still a good time to invest in equities? There are several stocks which we are unlikely to buy at any price, as the balance sheets of these companies are too stretched. On the other hand there are some outstanding companies which are trading at almost the same prices as 4-5 years back, whereas these companies have grown both revenues and profits significantly over this period. They have also been accumulating cash, leading to a stronger balance sheet. The pendulum of valuation has swung from being very expensive to being very cheap. Some of these companies are interesting poised for very attractive returns in the coming years. We continue to accumulate these companies and fairly convinced the risk reward equation is stacked up significantly in favor of a patient investor.