After a 3.6% fall in May, equity markets regained most of the losses in June and closed on a positive note. Some of our recent investments continued to do well and some of the older investments reached expensive valuations levels, allowing us to exit some of these holdings. The portfolios continued to do well relative to the markets, despite the high cash levels that we hold. On a Year to Date basis, since 1 April 2010, markets are flat, whereas our portfolios are reasonably ahead of the market.
Indian markets continue to be strong despite the fact that most comparable sized global markets have seen sharp corrections. Among large markets, the US, Europe and China have corrected between 10-25% from their recent peaks, whereas Indian markets are still trading very close to their recent peak levels. Global markets continue to be plagued by the threat of a double dip recession, as most governments are choosing to reduce their budget deficits and their high debt burden. It is important to remember here that the global economy came out of a recession due to large scale government spending, and is likely to get affected if governments pull back on their spending. The relative attractiveness of Indian markets compared with other alternatives stands diminished for international investors. Under normal circumstances, this should translate to some correction in Indian markets, but we are surprised by the relative strength in the Indian equity markets – especially over the past month.
The commitment of the current Indian government to the reform process is probably what is driving the positive outlook towards Indian equities. The government’s bold steps in the oil sector shows the decisiveness with which this government is moving. Deregulation of the oil sector has been in discussion since 1994 and the government’s recent step to deregulate is very welcome as it will have a very positive impact onIndia’s fiscal deficit. While there does not seem to be any immediate threat of that nature, one wonders what the government would do if international oil prices move up significantly to say $120 per barrel when petrol may have to be priced at Rs 100 a litre. One needs to note that the oil sector accounts for over 10% of Indian GDP and we should see some interesting tests ahead on this subject.
The Nifty, after reaching a level of 5100 in Sep 2009, has been trading in a narrow range for the past 9 months. During this period, we have been seeing stocks showing a fair degree of volatility. As and when some of our existing holdings reach expensive valuations – from where we view upside potential to be limited with a significant downside risk we have been selling down our positions. On the other hand, other than in small pockets, we are not seeing stocks reach attractive buy points. As a result, cash is beginning to accumulate in the portfolio. If Indian markets start to move in line with other comparable global markets, we are fairly confident that we should get an attractive opportunity to invest. In the meantime, our portfolios continue to do fairly well and better than the market despite the large cash position in our portfolio.