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    Hbj capital ventures llp   monthly newsletter january 2014] i Hbj capital ventures llp monthly newsletter january 2014] i Document Transcript

    • Jan'14 HBJ CAPITAL VENTURES LLP Monthly Newsletter: HBJ Capital Ventures LLP Dear Partners, Indian Markets have been on a slippery slope over the past month and are consolidating after the strong bounce back witnessed during late 2013. The news flow for this month had been dominated by Global events such as additional Taper, Argentina's currency crisis and renewed fears about a Hard landing in China. While such news flows have created turbulence in the Emerging markets, Indian Currency and Equity markets have taken the news of additional Taper in its stride acknowledging the improved Macroeconomic scenario currently as compared with the scenario 6 months ago. As a noted Investor mentioned, "We Invest bottom-up, but worry top-down". Hence, while our Stock selection is not affected by Macro news flow - we continue to make allocation changes in our Portfolio stocks based on our perceptions of the Macro environment. So let me brief about our understanding of the broad economic conditions and the current Market construct. As always, we would like to overlap a few data points with the behavior of the participants to get a holistic view. In America, the sentiment is definitely robust on the back of strong Equity returns over the last two years. While there is optimism, Market positioning of several participants is still cautious with Equity allocations much lower than historical averages. There is enough room for increase in allocation considering the weak performance of alternative asset classes, including Gold which has suck in huge capital over the last few years. While there are some worries about an sharp increase in Bond yields, we need to understand that American economy still continues to face deflationary pressures and Interest rates is eventually a function of Inflation. While there is Asset Inflation in American Economy, Wage Inflation and Commodity Inflation continues to be extremely muted. Up until now, American economy is definitely showing signs of a beautiful deleveraging cycle where Inflation and Economic growth are being balanced well. The QE program has definitely provided room for the American Economy to heal itself and to improve over the last 5 years. Last few years have once again proved the effectiveness of - two time tested wisdom on Stock Market investments, "Buy bad news and fear" and "don't believe This time is different". Investors who had invested in American stocks between 2008-11 phase when every analyst was ultra bearish is currently sitting on healthy profits. As with every recession, there were several reasoning floated as to why this #912, 1F Main, Girinagar 2nd Phase, BSK 3rd Stage, BLR - 85 Page 1
    • Jan'14 HBJ CAPITAL VENTURES time is different and why Investors should not invest even at depressed prices. Only LLP way to get through these trying phases and drum up courage to invest capital against huge pessimism is to cut out the noise and focus on picking Quality stocks which are cheap. Coming back to India's Macros, very few people are pointing out to the healing that is happening to the bruised economy. India's problems such as drop in Financial savings, Current Account deficit, Fiscal imbalances, Huge fuel subsidy, Stalled CAPEX, soaring Inflation etc are slowly being sorted out. While several more steps are required to structurally improve the base Growth rate, we believe that the recent steps will definitely initiate a cyclical improvement in GDP growth. While we are faced ahead with a huge uncertainty in the form of Indian Elections - our belief is that most of our Portfolio Stocks can navigate through these political uncertainties without any serious impact and hence the best way to manage political risk is to manage it at the Stock level by picking quality businesses whose management can navigate through uncertainties rather than we hedging the political risk at the portfolio capital allocation level. While our complete non-positioning in the so called High beta stocks in Infra, Power sectors may lead to temporary opportunity losses, but we have enough proxy plays in our portfolio to benefit from an improvement in CAPEX cycle on a minimal risk of permanent capital erosion. While we may be tempted to take bets on deep value stocks such as Tata Sponge, we would definitely not like to bet on businesses with bad balance sheets (or) gruesome businesses even for tactical reasons. As we have been repeatedly writing, there is enough reason to believe that we are already into the early stages of a Bull market in Indian stocks. Participation continues to be abysmal, Quality stocks are being differentiated, Valuations are not expensive, Earnings have troughed out, there is enough Operational leverage for Margin improvements and Cost of capital is at its peak. We believe all these are setting our Markets for a healthy up move over the next 3 years. Our current equity portfolio with large allocations to good Mid-Caps and SmallCaps is extremely well positioned to profit from such an up move. We are confident enough to suggest that we would keep up with our history of consistently beating SENSEX without taking any undue risks. Regards, #912, 1F Main, Girinagar 2nd Phase, BSK 3rd Stage, BLR - 85 Page 2
    • HBJ CAPITAL VENTURES LLP Jan'14 [Principal Fund Manager, HBJ Capital Venture LLP] Date: January 31st 2014, Place: Bangalore, India #912, 1F Main, Girinagar 2nd Phase, BSK 3rd Stage, BLR - 85 Page 3