September 2, 2013
I just finished up the September issue of the Premium Access report and wanted to give you a brief update on the performance of the VIIR portfolio after a tumultuous month in the Indian markets. Year-to-date the Nifty index is now down (7.34%), the Nifty mid-cap index is down (25.32%) and the VIIR portfolio is up 1.53%. Obviously, with a large portion of the portfolio in cash, the recent outperformance wasn’t completely unexpected.
The macroeconomic data continues to be abysmal for the Indian economy. On Friday (30/08/2013) the latest GDP data for Q1FY14 reflected 4.4% growth. This is the third straight quarter of sub 5% growth. The data was also below the consensus outlook for 4.7% growth. The Indian economy is clearly decelerating. The threat of QE tapering is leading to expectations of higher interest rates in the developed world. Money which had been flowing into Asia in search of yield is now heading back to the West. And that makes the ability to finance current-account deficits more difficult.
If the RBI hikes interest rates in order to defend the Rupee it will slow down the economy, leading to a further decline in confidence and additional outflows. If the RBI tries to defend the currency it will deplete reserves and erode confidence. Even if the RBI does nothing, the Rupee will most likely continue to weaken. The best hope is that the US Fed doesn’t actually begin tapering.
I think the current growth slowdown has not impacted the long-term growth rate of the economy. Growth did slow to similar levels in early 2003 and then subsequently accelerated. If the next government can deal with both the fiscal and current account deficit, it’s likely that growth can pick-up.
From an equity investor standpoint, there are going to be large dislocations in the market and high volatility. If you can take a longer-term outlook meaning 3-5 years, there will be numerous chances to pick-up stocks at bargain prices.
For example, I just highlighted, in the September issue of VIIR, a company that has dominant market share in the Indian market, a wide “moat”, industry leading profitability and is trading at a 30% discount to my estimate of fair value. For the first time since I launched VIIR, I’m finding high quality businesses trading at large discounts.
To learn more about these companies, you just need to sign up for a subscription to the Value Investing India Report.