Quarter 3, 2015.

​For a contrarian value investor like us, a lot of good things happened last quarter. It all started with China. Shanghai Composite, after the June sell-off, dropped another fourth or so. We aired our concerns regarding the Greek exit and Chinese slowdown in our last letter. It turned out that China was a far bigger problem than Greece. This is not entirely surprising given that Chinese economy is now responsible for about half of world’s GDP growth. However, the extent of slowdown, the Chinese government’s reaction to it and the resultant fall-out took the markets by a huge surprise. Then came the US Fed’s do-nothing decision, which just added to everyone’s confusion. The US market, worried sick at this point, promptly dropped to make the quarter one of the worst since the global financial crisis.

In fact, the drop in the US equity markets somewhat understates the extent of the panic. Consider the high yield bond market, which generated fourth straight month of losses – a first for the asset class since 1994. Alternatively, consider VIX, a measure of future stock market volatility which is popularly known as the fear index. US VIX crossed 40 in late August. Last time that happened (in Q3 2011) we were dealing with the Euro crises and a US downgrade. The price action in the emerging markets such as Brazil, Indonesia, Malaysia, Turkey and several others, was even worse.
 
The Indian economic story was quite a bit different. Consumer price inflation steadily came down to sub-5%. Industrial production data, though still weak, progressively got better. The country, being net commodity importer, reaped substantial benefit from the commodity sell-off. The prime minister was busy selling the country to foreign investors, and they liked what they heard. FDI inflows are close to record highs. Finally, RBI cut the benchmark repo rate by 50 bps, a substantial loosening resulting in the lowest rates since April 2011.   
 
We, at Willow, could not have asked for more. As mentioned in our previous letter, we had been busy shopping in Q2. We accelerated our pace in August and are now close to fully deployed. Like everyone else, we don’t enjoy marked-to-market losses on our investments. However, if we can trade some un-realized losses for a chance to invest at extremely cheap valuations, we would do it all day long. Q3 gave us just the opportunity. As usual, we will present a detailed overview of our portfolio composition our annual letter. Meanwhile, we describe our two most recent purchases below.
 
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In closing, our long term confidence in India remains high, and fortunately we were able to buy some deep discounts last quarter. We believe that we are now sitting on the most lucrative portfolio since mid-2013. The seeds have been sown. Now we patiently wait for the bounty.   
 
If you have questions regarding this letter or your portfolio, please do not hesitate to ask. As usual, you will receive your statements from NAV Consulting Inc.