First things first … the elections are finally over. Thank god!
With 302 seats in the lower house and a near majority in the upper, Modi can now push almost any agenda he wants. Will he push the right ones? Our starting point on these issues is this fascinating quote from Thomas Sowell:
"No one will really understand politics until they understand that politicians are not trying to solve our problems. They are trying to solve their own problems - of which getting elected and re-elected are No. 1 and No. 2. Whatever is No. 3 is far behind"
Unlike America, India does not have term limits, so one can safely assume that Modi would like to stay India’s prime minister forever. Everything else, including economic policy, is a byproduct. Once we’re past that, we can blend in the following if-thens:
If Modi-II is Modi-the-four-term-Chief-Minister-of-Gujarat, then we are all set, policy wise.
If Modi-II simply stewards Modi-I’s policies (GST, RERA, IBC, etc.), tightens enforceability, and accelerates dispute resolutions, then yet again we’ll be fine.
If Modi-II, by some miracle, fashions himself after the likes of Lee Kuan Yew, then we have a lot to look forward to.
If Modi-II, instead devolves into an authoritarian, the examples of which are almost infinite, then India is toast. At least temporarily.
Ultimately, we expect more of the same – mostly investor friendly policies, with trace amounts of socialism here and there. Periodic announcements of hairbrained policies, which get walked back when the business community complains. Lots of distraction. Tons of PR. And India progresses - in fits and starts.
We hope for more starts and fewer fits. Though let’s be clear that it’s the fits that make all the money. To invest successfully in India, one must choose what one wants to buy, and then wait for the market to throw a fit. It does so with amazing regularity (2009, 2011, 2013, 2015). We are currently in the midst of one.
It appears that the recent build up in credit, especially after demonetization, when banks suddenly received large quantities of unwanted deposits, is causing some indigestion. The country started de-levering in the earnest late last year. Funding got tighter and the IL&FS crisis tipped things over. Next, a few marquee borrowers, such as Dewan Housing, Reliance, Jet Airways, etc. defaulted or quasi-defaulted. Simultaneously, the government got extra vigilant with corporate governance, tax collection, and recognition of bad loans. These actions, though welcome in the long run, tightened the credit markets even further.
We don’t think this will metastasize into a full-fledged recession. But if it does, we are prepared – first, by staying away from shoddy financials and stupidly levered names. Second, by avoiding portfolio leverage; we’re negatively levered if you count cash. Third, by standing ready to buy assets at fire sale prices. We haven’t added new names to our portfolio in a while. And we won’t, until the price is right for the names we like. We are good at active patience, and it has paid us very well so far. Stay tuned though – we’re getting warmer.
Notes & Letters
A collection of our thoughts, views, and excerpts from our investor letters.