Markets
Equity markets in India were mostly flat with a negative bias for most of the month. Despite some respite in the form of lower oil prices, stock markets continued to remain cautious as there are larger concerns over economic growth due to high inflation and high interest rates. Indian markets are also being affected by a general shift in global money away from emerging markets like India and China. For the Financial year, the Nifty is down about 8 percent and the mid caps indices are down about 11 percent. Despite the steep fall in the markets, our portfolios have performed positively due to a careful choice of attractively valued stocks that are broadly unaffected in this downturn.
Environment
High inflation continues to be a concern, currently ruling at over 12 percent. Inflation in recent times bottomed out at 3.01 percent during the 1st week of Nov 2007 and it is widely believed that the current high inflation rates will continue till about Nov 2008, after which things are expected to ease a bit.
Oil prices corrected sharply during the month, but it is still well above the price about 6 months back. The US accounts for about 24% of global demand for Oil, and oil price correction was led by a drop in demand in US. Given the tight supply environment, we believe a much sharper correction in demand would be required to reign in oil prices. Apart from oil, there seems to be some indications of other commodity prices also starting to fall due to concerns over demand. If this trend continues, it can lead to a much sharper correction in inflation over the next 8 months.
The Rupee has reached almost Rs 44 / USD and the continuing weakness, driven by high oil import bill and reducing foreign investment is a cause for concern and the trend seems unlikely to reverse in the immediate term.
Companies
Warren Buffet said in a recent interview – “you only find out who’s been swimming naked when the tide goes out. Well, Wall Street has turned out to be a nudist beach”. The global financial services industry and several other industries in India have also been through a similar period of excesses. It is our endeavor to invest in companies that have a strong sense of discipline towards business, and follow the right path that leads to strengthening long term business fundamentals rather than make decisions that offer near term benefits only. Over the past few months, the market has again started rewarding such companies with better valuation as they have reported performance numbers that are absolutely good and far better than peer group despite the tough business conditions.