August 28, 2013
The market is crashing and the Rupee is hitting new all-time lows. The reaction in the market yesterday was purely driven by the passing of the Food Security Bill. The government needs to start implementing policies that reduce the fiscal deficit in order to bring it under control and not vice versa.
The food bill is negative in terms of optics as well. Foreign institutional investors need to be reassured that the government understands the magnitude of the macro problems facing India. The food bill will only serve to worsen the fiscal deficit and inflation. By passing the bill at a time when the Rupee was already reeling, simply supports the argument that the current government is flying blind.
The only positive news is that a combination of continued inflation and slowing growth will eventually lead to reform. Politicians will only opt for serious reform when they’ve exhausted all other options. In an excellent article in First Post, R Jagannathan makes an excellent point when he states, “the CAD is forcing the government to open up the economy more to bring in dollars, and the fiscal deficit is pushing the government to start reducing subsidies.”The government will eventually be backed into a corner and forced to pursue reforms.
Fortunately, the current account deficit is somewhat self correcting. A weaker Rupee reduces imports and supports exports, which naturally helps improve the current account position. Although India is not a very export oriented economy, the decline in the Rupee will still serve to reduce the current account deficit. If the government can actually get its act together and begins liberalizing FDI rules, we could see a swift turn around.
However, the point of this post was not only to highlight the currency issue but also emphasize that rising volatility will produce opportunities for fundamentally driven value investors. We are not in a secular bull market and the potential for significant market volatility could play havoc with your portfolio. Let’s face it, buy and hold is dead in this market. Buying an index fund and hoping for the best over the long-term is no way to invest.
One bright spot in the current market environment has been the IT sector. I originally recommended Hexaware back in May, 2013 when it was trading in INR 80 range. On Monday (August 26, 2013), the company announced that Baring Private Equity Asia will be buying out Atul Nishar’s 27.7% stake along with General Atlantic’s 14.7% stake. Post buyout Baring will make a mandatory open offer for an additional 26% of the company at INR 135 per share. Following my initial investment recommendation to Premium Access subscribers, the shares have provided a 56.3% return (including dividends) as of Tuesday’s (27/08/2013) closing price. I don’t have to remind you that this return was achieved during a period of utter market turmoil. You can see the dramatic outperformance of Hexaware vs. market in the chart below.
I’ve actually provided free access to my premium access report on Hexaware to all subscribers on my free distribution list. You can login using the following link and you can access the report via the membership navigation bar on the left side of the screen. Obviously, Hexaware has been my top performing recommendation year-to-date, but the overall VIIR model portfolio has held up admirably. The chart below compares performance of the VIIR portfolio year-to-date vs. both the Nifty and Nifty mid-cap indices. As a side note, I’ve seen some of my competitors compare their performance to only the Nifty mid-cap index because it enhances their relative performance. I think its disingenuous and completely misleads potential subscribers.
I know the results look too good to be true, but I encourage you to subscribe to premium access and to audit my investment recommendations firsthand. All monthly reports since the launch of VIIR are archived on the site.
I’ve started a new practice of reading Buffett’s annual letters in the morning before I start doing any other work, to gain a broader perspective on markets and investing in general. It’s easy to get swayed by the daily news flow and very difficult to step back and take a longer term view. I came across the following quote in his 1982 letter and it made me switch my thinking to a more constructive outlook:
“Our partial [stock] ownership approach can be continued soundly only as long as portions of attractive businesses can be acquired at attractive prices. We need a moderately-priced stock market to assist us in this endeavor. The market, like the Lord, helps those who help themselves. But, unlike the Lord, the market does not forgive those who know not what they do. For the investor, a too-high purchase price for stock of an excellent company can undo the effects of a subsequent decade of favorable business developments.”
The current fear and loathing consuming the Indian market is also providing numerous opportunities to buy high quality companies at steep discounts to intrinsic value. It’s easy to get caught up in the near-term macro panic because the outlook is uncertain. However, it’s important to remember that your primary goal as an investor is to find high quality businesses that will provide compound returns on your capital over long periods of time. If you watch the downside by buying high quality at cheap prices, the upside will take care of itself.