Markets
Equity markets performed strongly this month and scaled new levels. Market strength was led by the Reliance family of stocks. One also needs to note that the news front page headline for every new 1000 on the Sensex being reached is on a diminishing return. 16000 to 17000 on the Sensex is about 6.25% and it is not as high as the move from 4000 to 5000 about 4 years back.
Environment
The US government, feeling concerned with the credit market collapse and a slow down in the housing market in US, decided to reduce interest rates. A reduction in US interest rates forces large pockets of money to find it way to other markets – like India– where return potential is higher. As a result of this move, there was large inflow of funds intoIndia, leading to a strong equity market performance in India. India is also one of the economies that seems to be affected to a lesser extent, due to the credit market collapse, as compared with other developed markets.
A side effect of this is a strengthening of the Indian Rupee versus the Dollar. International travel is cheaper nowadays and any imports are generally cheaper. A strong Rupee is a good sign over the long run. NRI’s who have invested in India would have gained about 12% on just the currency over the past year. The Rupee at Rs 39.7 / $ has reached levels not seen since 1998. On the other hand, this is starting to affect the exporters badly as their margins are likely to get affected. Though the exporting companies are available at extremely attractive valuation, we need to treat them with caution if this trend continues.
Companies
With markets at these levels, one may be concerned over stock performance in the near future. Even at this stage, we are seeing several pockets of the market available at quite sensible valuation, and that too not on inflated earnings. On the other hand, there is a large part of the market that is being valued more on dreams than on hard reality. At some stage, if not soon, lot of investors are going to find out that they have paid up for thin air.
HDFC Bank has been one of the strong performers in the portfolio this month. The bank is expected to grow in excess of 30% annually for the next few years – as it has been over the past several years. We also initiated some position in Trent during this month. The retail space in India – as in any other country – is an exciting space to invest in. Interestingly, over a 30 years period in US, 5 of the top 10 best performing stocks has been a retail company.