Hbj capital ventures llp   monthly newsletter may 2014]
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Monthly Investment Newsletter from Gokul Raj, (Head - Investments, HBJ Capital)

Monthly Investment Newsletter from Gokul Raj, (Head - Investments, HBJ Capital)

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Hbj capital ventures llp monthly newsletter may 2014] Document Transcript

  • 1. HBJ Capital LLP MAy`14 # 9 1 2 , 1 F M a i n , G i r i n a g a r 2 n d P h a s e , B S K 3 r d S t a g e , B L R - 8 5 Page 1 HBJ Capital - Asset Management Dear Partners, The month of May has been an inflection point for Indian markets. The Maxim : "Sell in May and go Away" has been turned upside down this month. Indian stocks especially the Broader market have gained significantly over the past month. The historic election verdict has certainly boosted sentiments all around. The importance and effects of Animal Spirits and Positive sentiments on an Economy are well summarized by several behavioral economists. We would like to believe that this Election verdict would be a catalyst to an economy that was already shaping up for a cyclical recovery. We believe that the tailwind of reforms initiated by the past Government over the past 18 months combined with bottoming out of the economy would certainly help India post better numbers going forward. We believe that this Government has the opportunity to turn this cyclical improvement into a structural one with the necessary policy reforms and effective governance going forward. Change in the Management is a significant event, especially if there are a lot of low
  • 2. HBJ Capital LLP MAy`14 # 9 1 2 , 1 F M a i n , G i r i n a g a r 2 n d P h a s e , B S K 3 r d S t a g e , B L R - 8 5 Page 2 hanging fruits to be plucked by an incoming efficient Management over the Medium term. Despite the gloom of the past few years, we were unabashed believers of India's growth story and need to invest into Equities at the attractive prices offered over the past 2 years. Before, we go to our views on Markets - let's understand the reasons for our bullishness on India's growth story despite so much negativity over the last 5 years. Election Verdict confirms some of our deep assumptions : - India is evolving into a Right-of-Center capitalistic society with strong development ambitions and moving away from the socialistic society craving for Hand outs. (Whether it's Congress (or) Third Front (or) BJP, every Government has been in this direction - but the pace varies based on the leaders/ policy agenda at that point). - India's strong fundamentals in the form of demographics, democracy, independent media etc would naturally pressure the necessary changes required for India to become an extremely strong Economy. With an extremely resounding Election verdict, we believe that this shift would get accelerated and India performs to its true potential to emerge as the fastest growing Global economy over the next decade. Markets can have once again proved that - It's the uninformed who tries to time the Market. Also, as we have been repeatedly writing - Big Money in the turning points and it's impossible to time them. Most good stocks are up by almost 50-100% over a short period of time. Our Market View post Election Results :- For all this bullishness on the Economy - the old maxim, "Good News and Good Prices don't come together", stays true. As we have been highlighting for the past several quarters, "Investors make money by Buying during bad times and not by Buying during good times". This can be seen from the sharp run-up in share prices prior to the event and the opportunity loss of Investors who were waiting for a clear picture. While people can turn around and say, "You guys gambled with a high Equity Allocation. What would have happened with a bad Election result ?". We believe that we were buying great businesses, run by good managements and that were available at attractive valuations. They would have done well overtime even without a Good government. Bottom-
  • 3. HBJ Capital LLP MAy`14 # 9 1 2 , 1 F M a i n , G i r i n a g a r 2 n d P h a s e , B S K 3 r d S t a g e , B L R - 8 5 Page 3 up investors have continued to make lots of money by just focusing on buying good businesses irrespective of big Macro-Economic issues. We have also believed that India's GDP growth was below its trend line of growth (sustainable GDP growth) over the last 2 years and Markets were pessimistic to believe that Growth would continue to stay there. We made our bets believing that good stocks were factoring very pessimistic growth numbers and there was a large Margin of safety for making attractive returns by overall GDP growth just returning to its Trend line of growth. This election result however enables the Government to improve its Trend line of growth by structural reforms. The biggest mistake that investors make after missing the initial set of results is to chase low quality stocks that have still not moved up. While this may prove fruitful initially, Investors would realize the fallibility of such buying within a few years. To get some Historical perspective on this, even during the elections of Right-Wing idols, Margaret Thatcher & Ronald Reagan, the stocks moved up significantly initially but Markets had corrected over a two year period leading to losses for Investors who bought low quality scrip's purely based on positive election results. At the same time, we are not one of those Investors who are failing to understand the structural shift of investment opportunities from defensive sectors to cyclical (or) economically sensitive sectors. Unlike the commentary in the recent "Connect the Dots" report by Morgan Stanley, we believe that shift is there to stay for some more years (but not in low quality names in high quality Cyclical stocks). While the overall view (or) Consensus is to BUY, shouldn't we be selling in line with our contrarian approach to Investing ? We believe that is not the case this time as the Market is still under pricing the extent of recovery. As Akash Prakash puts it eloquently in his latest article, "This is not the time to be Bearish just because most Investors are Bullish". We believe that Economists, Analysts etc have anchored expectations that are conservative because of consistently bad results over the past few years. We believe that they would be surprised positively on the upside. The Virtuous cycle that can kick in with a few positive developments can lead to positives in a much bigger way than most people are currently anticipating. More importantly, though the tone seems to be bullish, the positioning of most Investors is not extremely Bullish with most skeptical to BUY at current prices.
  • 4. HBJ Capital LLP MAy`14 # 9 1 2 , 1 F M a i n , G i r i n a g a r 2 n d P h a s e , B S K 3 r d S t a g e , B L R - 8 5 Page 4 At the same time, we believe that there is some froth building up in low quality stocks and it's important to stay away from them. We believe that there are still some good economically sensitive stocks that are available around fair valuations. Investors who would make most of the money going forward would be the ones who are able to identify fundamentally sound stocks that magnify shareholder returns from the improving operating Leverage due to the positive Macro environment. The Bad quality stocks would lose the positives of a positive economic environment as there are few businesses that can efficiently trickle down positive Macros to good shareholder returns on a sustained manner. Most businesses due to their Business model, lack of pricing power, increasing competition etc would lose out within a few quarters. We believe that our Portfolio contains a few of those stocks in the form of Greaves Cotton, VA Tech Wabag, HSIL, Sanghvi Movers, DB Corp etc. We believe that these positions would benefit from a positive macro environment in addition to their solid fundamentals and can deliver strong returns going forward. We believe that, if this is a Bull Market, we need to stick with our Winner and Sit tight on these holdings. Our Portfolio outperformance across Market conditions have highlighted the advantages of Bottom-Up stock picking, Balanced Portfolio and Common Sense investing. We have done well during GDP downgrades, Rupee depreciation, Global crisis, extreme bearishness and also during the optimism of the past few months. Unlike investors who have done extremely well during 2011-13 phase but underperformed hugely during the last 6 months (Top-Down investors have done well during this period), we have been able to beat Benchmarks and deliver strong absolute returns across phases. The key reason to such a performance is not getting boxed in particular styles of investment that have done well during the immediate past and looking at stocks in an rational manner without any prejudices. Before we PAT ourselves too much for our performance, we need to remember the old Maxim - "Never confuse Brilliance with a Bull Market". We need to remind ourselves of simple but powerful commandments that we have set internally. - Buying Fear and Selling Greed is the best possible trade in Markets.
  • 5. HBJ Capital LLP MAy`14 # 9 1 2 , 1 F M a i n , G i r i n a g a r 2 n d P h a s e , B S K 3 r d S t a g e , B L R - 8 5 Page 5 - Don't work with Targets on your Investments. Your winners need to be held onto tightly despite the short term booms in the stock price. - Never extrapolate a Short term trend & don't anchor yourselves based on immediate past. - There is a leap of faith in investing and hence, don't miss good opportunities for few minor black spots while analyzing a stock. No Idea is perfect. - Search for opportunities that present High Uncertainty and Low Risk, thereby leading to High Probability of returns. - You can Win Big, only if you are ready to differ big from the general Consensus. - Always be a Multi-Dimensional Investor and don't Box yourself into a particular style. - Be prepared for short term underperformance, if your vision is to deliver absolute returns. - Conviction makes money and it only grows overtime. Hence, be ready to bet BIG on ideas in which your conviction levels continue to strengthen irrespective of Market movements. - Be aware of the Power of Reflexivity and Dynamic nature of financial variables. Only an objective mind can consistently process information to make the desired changes. We believe that our performance would continue to be strong over the next 3-5 years. If we have been able to deliver strong returns over the last few tough years, then we can certainly deliver far better returns going forward too. To give an example, during the last Bull run - while SENSEX went up for 4X, the Small & Mid Cap indices went up by almost 10X.With a Portfolio that is fully exposed to small & mid caps, we are certain to benefit from this trend. Unlike other, we don't worry about Bubbles. In fact, they create the biggest Market inefficiencies and thereby the best opportunities to create wealth. The current results season has been a mixed bag with mostly positive results. Our quality Mid-Cap and Small-Cap stocks have delivered well. While our stock idea - B**JE has disappointed with yet another quarter of bad results, stocks such as C***A, I***L, D**F, V**G etc have delivered
  • 6. HBJ Capital LLP MAy`14 # 9 1 2 , 1 F M a i n , G i r i n a g a r 2 n d P h a s e , B S K 3 r d S t a g e , B L R - 8 5 Page 6 stunning results. We believe all our companies are well poised for the upcoming economic improvement, as most of these names have significant operating leverage and are still quoting at attractive valuations. We would ride the Bull market with our concentrated and lower churn Portfolio. Regards, Gokul Raj. P, [Principal Fund Manager, HBJ Capital Venture LLP] Date: May 3oth 2014, Place: Bangalore, India