Watch the Macro, Focus on the Micro
Our challenge, as an India focused value manager, remains: to understand and analyze the businesses; to decipher the valuations ascribed to these businesses; and to understand the ability of the management to guide these businesses in good/bad times - the unflinching question of leadership is crucial.
But companies/managements cannot work in isolation without a macro framework. Our macro framework is built on the fact that India’s realistic GDP growth is likely to remain 6%-6.5% over the long term, irrespective of which political party is in power. While potential to grow faster exists, the society and political will to push India’s economic growth to a desired rate of 8%-8.5% depends on priorities. These priorities are a function of the societies’ political mandate, the political will to aim for an equitable and faster GDP growth based on this mandate and policies that enable Corporate India to invest aggressively to drive growth.
Most of our macro analysis/commentary is focused on deciding this macro framework to use in our models i.e. real GDP growth, inflation, interest rates and foreign exchange. Across our financial models, we use: real GDP growth of 6%-6.5%, inflation at 5%, 10-year long bond yield at 7% and USDINR in 2% range.
We review these assumptions every year based on developments in Society that influence Politics, which in turn designs policies for growth for industry thus benefiting companies.
Why India? Politics Does Not Matter
“Long term investors should ignore the political battles in India. Much of it is, well – politics - and much of it hides the simple but powerful fact: India’s GDP has grown by 6.2% per annum in real terms for 40 years; across 10 governments, 7 of which have been coalitions.”