Indian markets shine amid weak globe

As you would be well aware, the global markets are facing significant volatility led by concerns on slowing growth across economies and falling commodity prices, especially crude oil. In this context, the Indian markets have remained an oasis of performance buoyed by expectations of cyclical recovery in the economy as well as decisive governance. India has been one of the top performing equity markets globally with Sensex up 35% in CY14 till November as compared to NIL for global emerging markets index (MSCI Emerging Markets), 12% for US (S&P 500), and negative returns for commodity export dependent economies like Brazil/Russia. Inertia portfolio is shining even more with 48% returns in the last one year vs 38% for the Sensex!

Have Indian markets gone too far ahead of themselves? Sensex is trading at ~16x P/E based on the expected FY16 earnings, close to its long-term one-year forward average. However, this is based on expectations of a sharp earnings revival for Sensex from 14-15% growth in FY15 to 20%+ in FY16. The obvious question to ask is whether the markets have become too optimistic, leaving room for disappointments in the near-term? We believe this could well be possible as the government machinery, while starting to get going, might take some more time to start running seamlessly. Meanwhile, economic growth continues to linger along at sub-6% with no definitive indication of a significant improvement at the ground level as yet. As always, it is a classic situation where some people Might lose the patience and throw in the towel! However, in doing so, they will probably make a costly mistake by not looking at the relative strength of the Indian economy in the current global setting as well as the transformational changes that current government can undertake over the next several years.

We remain bullish, near-term concerns not withstanding: We maintain our positive long-term view and remain bullish on the market. Over next several years, we believe that Sensex has a potential to grow many-fold. As always, Inertia portfolio should be able to beat the Sensex decisively, thus helping you clock even better gains! Given our quality focus and long-term holding period, we also ensure that you are able to sleep well as night even amid volatile markets and don't incur high transaction costs...

Earnings microscope: We reiterate that the earnings performance of the portfolio companies is the ultimate value driver and far more critical to the overall investment performance rather than the share price changes. Last quarter, we had put in a framework to analyse the quarterly earnings performance of the portfolio and present to you a crisp analysis of the same. Its not all good news though! The weighted average earnings per share of the inertia portfolio was up just 2% in July-September 2014 quarter vs July-September 2013. The overall portfolio earnings performance was dragged down by decline reported by 8 out of the 30 stocks due to certain one-time items as well as continued economic sluggishness. On a trailing twelve months basis, Inertia portfolio companies have generated Rs 4.3 in profit after tax for every Rs 100 currently invested in the portfolio. As always, we have been closely monitoring the performance and have decided to remove a couple of names from the portfolio to give way for some more promising ones. We will send the details of the same to Inertia investors on a one-on-one basis.

Wish you a successful and profitable 2015 in advance...