June 2008

Markets

Equity markets witnessed one of the worst months in recent times with the Nifty seeing a 18 percent fall this month. The fall witnessed was pronounced among stocks in real estate, engineering, banking, cement and oil marketing companies. Other sectors like Information Technology, Consumers, Pharmaceuticals did relatively better. The 34 percent fall in the market over the past 6 months has seen very divergent behavior, with the bottom 5 stocks in the Nifty falling about 65 percent, whereas the Top 5 stocks delivered positive returns.  The portfolio has been doing relatively better than the market due to investments in IT and Consumers doing well. Though conditions are looking tough for equity markets, after almost 2 years, one is starting to see some very attractive investment opportunities among large companies. We believe the market is within about 8-10 percent of its bottom and probably a good time to build some core investment positions.

Environment

The sharp fall in the market was triggered by the high inflation numbers of over 11 percent and high oil prices. High oil prices continued to plague the global markets with authorities resorting to increasing interest rates to fight the inflation. With some of the major sources of global oil like Mexico, Russia, North Seas, etc starting to deplete, there is some serious concern on supply of oil. Oil current accounts for about 36 percent of global fuel demand and better fuel efficiency seems to be the only real solution. In the mean time, most data suggests that one needs to be prepared for an environment of high oil prices.  On the currency side, Oil imports of $ 57 billion in 2007 is likely to be substantially higher this year leading to a sharp jump in the trade deficit ($ 10 billion last year). With foreigners pulling money out of India, the Rupee will continue to be under pressure.

Companies

In the environment of a weak rupee, Information Technology companies are likely to do well as they will benefit from a higher Rupee denominated growth and expansion in margins. Though many of the high flying stocks of last year have seen a dramatic fall in prices, valuation in several cases are not attractive enough to start investing. HDFC Bank has seen a sharp fall in stock price and we have been increasing our investment in the stock over the past few days. We believe, with the acquisition of Centurion Bank of Punjab, the bank will be able to deliver growth in excess of 25% despite any weakness in the economy.