June 2015: Greek Exit? – Fallout on India?

The Indian equity market was down 0.8% for the month – and is now roughly flat for almost eight months now. Our portfolios continue to do well. The market was worried initially about whether the monsoon would turn out as bad as the Indian met department was predicting at 88% of the long period average. As of June 29, which is about three weeks into the monsoon, the cumulative seasonal rainfall for the month of June is 183mm, which is 118% of the long period average. While of course, July and August are still to play out, the first month has been good and augurs well for the whole season.

Most global markets continue to fret about the Greek situation, and it appears that the Greek drama has reached its final Act. The Greeks have to now decide whether they want to be part of the Euro, as the Greek Prime Minister Tsiparas plans to go to the Greek people in a referendum. The Greek banks are as of now, shut. Over Monday and Tuesday, after the announcement by Tsiparas, while equity markets in Europe were volatile, there was no significant change in the government bond yields of Spain and Italy – 10 year government bond yields in these countries continue to be one third of what they were in 2012. Also, the size of Greece’s government debt at $360 billion is not very large when you consider that some investment banks have assets of close to $2 trillion – therefore the situation is not as bad as the 2008 crisis when many of these investment banks were in trouble. The fact that one does not see contagion yet does give one some assurance, but the world will continue to watch the situation over the next few days as some analysts weigh impact, both economic and non-economic such as from a military strategy / foreign policy view.

Meanwhile, India’s current account situation continues to strengthen with the deficit now down to 0.2% for the quarter ended 31-Mar-15 and 1.3% for the full year ended 31-Mar-15 as against the worrying 4.8% it had reached in the quarter ended 30-Jun-2013. Also the RBI’s forex reserves have been swelling – reserves are up $48bn to $352bn from 31-Mar-14 to now – Interestingly $32bn out of that number has been accumulated since 31-Dec-14. The RBI has thus built a lot of leg room to better face any situation that may arise as a result of a continuing poor global situation – it has cushion in terms of forex reserves and also by keeping the repo interest rate at 7.25%, the RBI has a lot of room to cut interest rates to drive growth if inflation remains contained. A good monsoon would dampen inflation and may encourage the RBI to cut rates in the busy season policy later in the year.

Expert value investors like Warren Buffett recommend that one should not over-analyse macroeconomic concerns, and focus one’s efforts on the study of the prospects of individual companies and the prices at which they are trading at as compared to their intrinsic value. The premise in that statement is that crisis and excessive optimism are a part of the normal evolution of economies. A truly great company finds ways to manage itself well through both bad times and good. We have several companies in India with some excellent prospects in the coming years. The Indian consumer is on a strong wicket – a young population, increasing income, high savings rate, little borrowing and under-served. Some of these companies are trading at prices that are at a reasonable discount to intrinsic value. Big draft downs in these stock prices, due to negative economic news offers an opportunity for long term investors.