The turning tide

The high tide of positive Indian sentiment is out.

It was foreseeable.

It has been one of the longest spells of positive outlook toward India.

One of the oft-repeated statements by Indian fund managers is that the (Indian) market is a slave to earnings.

At the time of the high tide, that axiom was seemingly suspended.

Like Icarus, Indian multiples reached new heights – stretching already rich valuations.

The gravity of earnings no longer seemed to matter.

And the rising tide lifted the valuations of all boats – not least public sector undertakings (PSUs) and small cap companies. ?

In part, this rally was driven by domestic flows and the systematic investment plan (SIP) investors.

As a result, even the skills of active management seemed to be in question.

Most active managers trailed their indices.

It the past six weeks that has all changed.

Inflation, margin pressure and declining sales for a slew of FMCG and consumer facing companies (retail and auto) reporting for the end of quarter three have disappointed.

Bajaj Auto, Nestle, Britannia Industries, Sula Vineyards, Hyundai India, Asian Paints, 3M India ………

The gravitational pull of earnings has been restored.

The market has contracted.

This is healthy for multiple reasons.

For one, the recent correction proves that the Indian stock market is underpinned by market fundamentals.

This contrasts with China – which is now a?renewed focus for many foreign allocators. When it comes to China the idiom “once bitten twice shy” is forsaken by some.

The recent pull back also allows investors, who missed the last high tide, an opportunity to invest.

On a twenty year view, India is probably one of the few great investment ideas outside of the USA.

In my experience the best time to invest in India is when it is no longer in fashion.

India became ominously popular.

When the likes of Goldman Sachs and JP Morgan write glowing reports about India, tread cautiously.

When they lose interest, it is time to show interest.