Our portfolio experienced higher than usual volatility last quarter, as did the broader market. MSCI India was down about 14% by the end of Feb, and then up 13% in March. China, yet again, was the scourge. In other words, if markets were to be believed, something happened China, which made things materially worse in India for two months, and then suddenly awesome in March. We wonder what that “something” was. We have looked around but haven’t found it yet. If we do, we will be sure to report it.
Of course, China’s problems are large. Any emerging market (yes, China is still EM) with a debt load of 280% of GDP is likely to get encounter a fiasco at some point. Add to that the breakneck speed of debt accumulation, quadruple since 2007, and we are almost certain to see some fireworks. Exactly how the country will get out of this bind is anyone’s guess. Debt to equity swaps, financial repression, outright repudiation, imprisonment of short-sellers, hope, and prayers, are all viable options in a country like China.
A serious recession in China will no doubt be ugly for India. China is India’s largest trading partner and accounts for almost 10% of its total global trade. More importantly, foreign investors are yet to wean themselves off the basket EM mentality. When stuff hits the fan, everything in the EM basket is a basket case, regardless of fundamentals.
But let’s shift our attention back home for a bit. India, post the global financial crisis, has experienced four mini-crises:
Going back through the annals of financial media, we found the following India specific reasons for the sell-offs:
Finally, here is how we currently stand on the aforementioned issues:
So, fundamentally, India is progressing in almost the opposite direction as China. Operating under this big China overhang, but a tangible improvement in Indian economy, we, as your portfolio managers, have the following choices:
To us, option c, by leaps and bounds, is the most optimal strategy. We firmly believe in India’s future as an investment destination. We also believe that following a contrarian, value strategy, like ours will lead to large outperformance over the long run. So we stick to it.
We made the following major changes to our portfolio in the last quarter:
Notes & Letters
A collection of our thoughts, views, and excerpts from our investor letters.