Equity markets, both in India and globally, rallied sharply during the month, finishing up 7.8% for the month, as the fears about the European debt crisis subsided somewhat. The jury is still out on whether the European debt crisis has been satisfactorily resolved. Domestically also, the issues related to inflation and a lack of government policy action persist. However after a nearly 20% fall since Jan 2011, the market had a relief rally. Our portfolios, trailed the overall market as the rally was restricted to the beaten down stocks.
One of the main concerns clouding the Indian economy continues to be the high inflationary environment, and the RBI’s commitment to bring inflation under control at the cost of growth. The RBI governor has categorically stated that the regime of high, and possibly higher, interest rates will continue till inflation drops to near the comfort zone of 5-6%. The economy has already slowed down considerably and it is possible that the slowdown may continue for the next few months. High interest rates and a slowing economy is not great news for stock prices. Moreover, though the European stock market has rallied somewhat on what looks like a short covering rally, the real problems facing these nations are far from over and we think that we have not heard the last on these problems yet.
In this context, the real question to address is whether it is a good time to invest in equities. Over the past few months, there has been a pronounced weakness in stocks where the balance sheets are weak and the businesses are uncertain. At the same time, markets are willing to pay a premium for businesses where the direction of the business is certain and profitability continues to be strong. Over the past few months, some of these companies have in fact been making new all time highs in the stock markets, despite the prevailing general weakness. The general market weakness is beginning to throw up some interesting opportunities in companies where the long term business fundamentals are very attractive. We have been buying into some of these companies over the past few weeks and expect more such opportunities to come up in the coming weeks. Though markets are not poised for any sharp run up in the immediate term, the coming days should be a good period to accumulate certain high quality businesses at prices which are statistically very attractive. We are fairly excited about the opportunity to put capital to use in the coming days and weeks.