There hasn’t been much time to blog in the past 8 months. Been very busy trying to adapt to the volatile stock market conditions this year. There already has been two 10%+ corrections that have lasted 5-8 weeks each. And despite that the valuations at 16348 are close to all time highs @22.4 times trailing earnings for the sensex. Well actually those figures are an optical illusion. If we strip out the forex gains for the past quarter and ignore the IT, Auto, commodity (i.e steel, aluminium) and oil sector(ex-Reliance Industries) the valuations are well above those reached last May. Now even commodity stocks like RIL quote @ 20x one yr forward which is well above valuations that global oil exploration majors trade at.

The macro conditions too have deteriorated over the past 6 months. Globally the sub-prime mess is threatening the stability of the whole financial system and the US Fed is being forced to aggressively cut rates. While that move has led to a ST upside in emerging markets it remains to be seen if they can really decouple if US goes into recession. Many of the Asian economies are still heavily dependent on exports to US which comprise up to 60% of GDP growth for some of them.

In India the RBI’s drastic moves on the interest rate front at the beginning of the yr have started to hurt growth now. I was very apprehensive then about such aggressive action(0.75% move in 3 months) at the fag end of a growth cycle. To me it reflected a lack of insight into our GDP growth trajectory. The rate hikes should have perhaps come much earlier in late 2005 and into 2006 when the whole real estate bubble happened due to unusually low rates. The auto sector growth is now down for the 1st quarter and the slowdown is fast spreading into other sectors including consumer durables. The slowdown in growth of commercial vehicles will soon have a trickle down effect in the manufacturing sector too. Hopefully now with inflation at a 5 year low RBI will bite the bullet and cut down rates to revive growth. Encouragingly FDI flows have been much larger than portfolio inflows this year. This despite the govt. dragging it’s feet on opening up new sectors like retail and insurance to FDI.

There have been significant changes in my portfolio in the past 8 months. For the first time in four years there is now no exposure to IT. The amazing rise of the rupee this year(more than 10%) have knocked the sails out of IT stocks pegging valuations down to 5 yr lows. My exposure to auto-ancillaries is trimmed now after the rate hikes and initial signs of auto sector slowdown in April. I’ve focussed more on companies with leadership, branding and pricing power while exiting commodity type businesses. So there is no place for cyclical sectors like hotels and cement where demand-supply mismatch is no longer as strong as in the last 2-3 years. Now I have some exposure to the fast growing entertainment sector(multiplexes) where valuations are more realistic after the correction over past 18 months.

After all this cleaning up I’ve ended up with a more concentrated allocation in each sector I’ve positive on. Accordingly the no. of stocks in my portfolio have gone down to 27 from 32 back in January 2007. Interestingly now I have a more modest exposure to small caps where there has been a marked change in performance(both business and stock price) in the last 4-5 months. This is not due to any change in my approach but just that some of my small caps have now become large mid caps in the past 2-3 years. Maybe it’s about time for me to try unearth some more small niche stories.