09.22.07
A bumpy ride so far…
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.
01.11.07
The Year of the Pig beckons…
A new year has begun. A lot of things have changed in my world since I last posted. My portfolio is more focussed and I’ve re-balanced it a bit(not done completely yet) in the last 3 months to reflect current valuations/business performance. I’m reasonably happy with my returns over the last 6 months, having more than recovered from the big crash in May and June. Smaller companies that comprise the bulk of my investments have somewhat lagged the market indices during this period. But luckily for me financial services and IT suddenly became mkt leading sectors again, helping offset the smallcap underperformance.
However it must be said that now @13650+ our mkt wide valuations are getting stretched again. People are getting too optimistic about the sustainability of current growth rates and not factoring in the effects of a cyclical downside in the global economy. Also interest rates have gone up 0.5% in the last 4 months and might trend up another 0.5% in the next 12 months. Present interest rates are now in fact within touching distance of 6 year highs(11.5% now vs peak of 12% in 2000). Since credit growth @25% is still probably higher than what RBI wants(15-20%) rates might stay up there for a while now to rein in growth.
Well all these macro worries notwithstanding the structural part of the Indian economic growth story seems intact for now. Manufacturing sector continues it’s amazing revival(now into it’s 4th consecutive year of robust growth) rebounding after a 7-8 yr slump since the mid 1990’s. So far the big players haven’t rushed in to announce extravagant plans yet. Hopefully they have learnt their lessons from the crazy post liberalization capex binge & subsequent bust.
Result season started in earnest today with two of my top overweights(& favourite companies) Infosys and HDFC Bank reporting q3 results. Not much change as far as business performance goes for these two jewels of our corporate sector. Infy reported results inline with guidance despite the Rs appreciating 3.8% during the quarter. They improved productivity and managed to negotiate better billing rates. Their dependence on US also reduced to an extent with European business growing more strongly. HDFC Bank clocked a 19 sucessive quarter of 30%+ growth in bottomline. It did this despite RBI curbing branch expansion for last 12 months ! This quarter they made up for lost time – adding 48 branches and 120 odd ATM’s. NII was up 38% and NIM’s steady at 4%. With the 1.5% increase in PLR in December the next few quarters should see these margins maintained. Both these co’s are expensive I guess by most normal valuation parameters and they have been that way for most of the current 4 yr bull run. Luckily I figured out early enough that adjusted for growth(and it’s sustainence) they were absolute steals for a LT investor.
09.06.06
Rock N Roll ain’t noise pollution !
All those derisive reviews in Rollingstone notwithstanding it seems AC/DC frontman Brian Johnson knew exactly what he was singing about all those years back.
“Hey there, all you middle men
Throw away your fancy clothes
And why you’re out there sittin’ on a fence
So get off your ass and come down here
‘Cause rock ‘n’ roll ain’t no riddle man
To me it makes good, good sense”
Researchers at a Scottish university now believe that the sound of guitar-based rock such as Jimi Hendrix, AC/DC and the Red Hot Chili Peppers improves concentration and boosts memory.(see report) Apparantly children who listen to loud rock or pop music while swotting for exams are probably improving their chances of success. No wonder that I scraped through college with so little study and so much of music and dope 
Previous studies have also shown that rock music improved the work rate of people collecting stock market statistics(yay!) and can have a positive effect on the brain chemistry of depressed teenagers. Now suddenly all my continued past and present obsessions like Nirvana, Pearl Jam and White Stripes make so much sense.
08.21.06
The problems with scale…
I have experienced a fair bit of management high handedness in my limited experiences of working for others. In my case most of these acts of callousness and cruelty were actually committed by normal people not evil monsters or egomaniacs. On reflection I guess apart from work related anxieties, the main cause was an acceptance by people in positions of authority that such acts were a part of corporate life. Also sometimes these incidents had their roots in an unwillingness to go beyond strictly defined corporate guidelines. Subjectivity of any sort is generally discouraged and preset rules and regulations were held sacrosanct.
An incident that typifies such behaviour seems to have happened to a cousin of mine yesterday. A brilliant student through school and in graduation, her academic record had one striking blot. In class XII she had barely managed passing grades while in the rest of her academic years stood firm among top 3-4 students. One would imagine any half decent HR person to instinctively inquire what lay behind that glaring inconsistency. But in her case that bit of basic courtesy wasn’t to be and she was deemed not fit after having passed the rigorous qualifying tests held earlier.
What makes it more poignant is that my cousin had a very valid answer to that absent question. Her father, a policemen bravely serving our nation, was killed by millitants days before the exams. It’s a wonder she actually passed in the first place. The biggest surprise for me is that such an oversight ocurred in an organisation oft touted in our media as one of best employers in our country. ‘Think scale’ that’s the blurb in one of Infosys’s recent annual reports that talks with pride about them finally arriving on the global scene. Sadly while reaching there it seems to have lost or scaled back on some of the core values that their founders like talking about so much to the media.
07.16.06
A search for balance…
Just been musing over some incidents that occurred with me over the past 3-4 weeks. Wondering why an on-line presence seems to affect behaviour so much. In the various on-line forums I’ve been part of in the past 3-4 years, similar extreme symptoms seem to arise in me and in others. The urge to appear smarter, more idealistic or honest seems overwhelming. Conversely also is the almost uncontrollable desire to criticize / cut to ribbons any remotely inadequate action by others. A subtler form might also be the urge to whine incessantly in blogs about how everyone in authority is wrong, corrupt, hopeless or without any sort of morals whatsoever. I suppose there are many very focused blogs that do make a difference by taking up activist causes. But the balance is kind of fine I guess since there are countless others that are just hopelessly phony. My last blog did have its moments on both sides of that thin line so I ‘ll be extra careful here. Much rather concentrate on things that I care about regardless of how insignificant or nondescript they may be.
