Anticipation & caution as markets go volatile.

lower-interest-ratesAfter the August sell off post China Crisis, September began with a consolidation while our PM met with the Industry leaders, bankers and economist to get ideas on managing the prevailing global turbulence. He had requested the industry captains to increase their risk and step up investments. The industry leaders used this opportunity to ask for policy actions that will improve the ease of doing business and the need for the interest to be reduced at the earliest.

This action brought strength into the markets which got supported by the European and Asian markets showing recovery along with some strength in the Indian Currency. Following which Government approved several reforms including the allowing of telecom companies to sell radio waves, added as a booster to hold support for the strength in the markets. The European markets charged further following the rise in exports and imports in Germany.

However there was still a lot of caution in the markets as investors were anxious on the outcome of the US Federal Reserve policy, which turned to be subtle as the cut was postponed. There is expectation that the strong fundamentals of India will provide enough protection from the global developments.

Then came, the sudden news of Volkswagen cheating the US markets with a fake emission report which shook the automobile stocks worldwide, Volkswagen lost 48% of its stock value in 2 days, which also impacted many of the prominent Indian companies having big presence in the European markets like Motherson Sumi, Bharat Forge, Bosch etc.,

The reports that the inflation went down to 3.66% and the Wholesale Price Index being negative at -4.95%, was a good stimulus to the markets and then followed the surprise from the RBI with a 0.50% interest rate cut, after which markets went into rally mode.

The ambitious goal to have the inflation at 6% by January 2016 looks like an achievable target. The RBI has now started working towards having the inflation at 5% in 2016-17. All these developments will take our economy to levels which we haven’t seen so far in our life.

Even after all these developments FII’s were net sellers while the Mutual Funds kept continuing with their buying spree in the markets. There are fairly high chances that the FII’s will return back and with a higher allocation for India.

In the meantime, Saudi Arabia withdrew about $70 billion from global asset managers to bring down the widening deficit & reduce exposure to volatile economies as their economy is going into a recession. On the other side of the globe Prime Minister Naredra Modi’s bilateral meet with the US president Mr. Barrack Obama concluded on a high note. Among the countries present like Pakistan & China, India became the centre of attraction. Business captains in the US committed to more investments in India which is a very nice development for our economy.

What was done on the portfolio?

There were 5 exits, 2 reduction of exposure, 6 additions and 2 increases in exposure. Our portfolio is going through a dramatic shift. In the first week of September we moved out of MM Forgings and Bharat Forge well before the Volkswagen news hit the markets, thus saving bigger losses. SKS Micro was exited after the company missed the Small Banking license. Schneider and Sun Pharma Advanced Research moved out of our portfolio. We brought down exposure in Cadila and Welcorp by 100 basis points following their ratings coming down on our ranking tables.

MaduraBrandsOn the additions side, we had 0.50 basis points increase in exposure to Aegis Chemicals and Cosmo Films and have added 100 basis points new exposure to Britannia Industries, Himatsingka Seide, JMC Projects, FDC, Aditya Birla Nuvo and Deep Industries.

Auto sector exposure is getting reduced considerably and is getting replaced with companies having good exports revenue and consumer centric businesses. Weakness in the Rupee is an advantage for companies having export revenues.

This festive season, as you shop for your Van Heusen, Louis Philippe, Allen Solly, Peter England and Planet Fashion for your clothing needs, you will be making a small profit to yourself due to your ownership in Aditya Birla.

Britannia has made a packaging change and has gone into a new promotion, its business is growing, and so, the next time you pick a ‘GOOD DAY’ biscuit pack in the store, you will be contributing a small profit to yourself.

We also have exposure in Hindustan Petroleum, every time you fill gas at the HPCL bunk, you make a small profit.

Feels good that our portfolio owns companies that produce most of the daily use products, just our consumption will not have an impact on the profit of the company, while we can take pride that we are using the products of companies that we own, is it not a good feeling?

Volkswagen emission crisis..

On22nd September SENSEX reeled down above 2%. This was not a big tremor to the public because they got used to such shakeouts since the Volkswagen LogoAugust 24th fall post China crisis. This time the story turned towards the other part of the globe, EUROPE, where there was a mostly calm situation apart from the known fact that the European economy is almost a stagnant economy. Volkswagen has cheated the US authorities by using a faulty emission test norm to sell about 11 million cars fitted with a poor performing diesel engine. Whereas, the company had been advertising across the US stating that their cars come with the cleanest diesel engine.

Now, the company is recalling 11 million cars from the market to fix this issue and it has earmarked more than 6billion euros to meet the crisis. The US government has filed a case against the company claiming damages to the tune of $18 billion. Its CEO Winterkorn, admitted to have screwed up the company for good. Volkswagen stock loses 48% value in 2 days since the issue got reported. The company being the beacon of engineering excellence in Germany, an automobile behemoth controlling most of the prominent brands under its ownership like Audi, Skoda, Porsche etc.,

The impact of this scandal to the global markets has been multilevel. Due to Volkswagen’s huge exposure in the auto sector and the prominent brands it owned, there are a number of companies globally, who are vendors to the groups businesses in Europe as well as across the globe. All these companies will get affected. Germany being the hub of Automobile engineering, there are a lot of Indian companies who own facilities in Germany and across Europe. Some of the big names are Motherson Sumi, Amtek India, Bharat Forge. All these companies have already taken a big hit on their stock prices.

Amtek is into a bigger default, already faltered on a 800 Crore debt and has about 15K Crores which are not likely to be serviced. This issue is going to take many of the PSU Banks and some Mutual Funds into hardship.

At a time when the world markets are under pressure due to the commodities meltdown, this issue added fire. The beauty here is that, the Beetle carautomobile industry segment was the leader in the last year’s market gains. There were many companies in the Auto Ancillary sector that gave very high profits to their shareholders. Now, within a year the same sector has become party to huge loss of wealth. This makes us realize that, anything that shines cannot shine for ever or at least cannot continue to hold the strength regularly. If someone has been invested in the auto stocks by virtue of their understanding of the industry growth, they should have already moved out of the investments, else will suffer losses now. The damage that is being played out is pretty huge and will take a lot of time to recover.

In our portfolio, we had big time exposure to auto stocks, mainly in the ancillary segment. A couple of weeks back our system had helped us move out of them to a larger extent. When auto stocks were in rally mood we had more of them, now as they enter into troubled zone, the exposure has got reduced by a natural process.