Look beyond the immediate.
The commodity super cycle played itself out over the past decade putting the user businesses under severe stress. Margins of commodity user industries experienced a sustained squeeze as businesses struggled under the load of rising interest rates, falling demand and high raw material costs. Now commodity prices have crashed and it is the turn of the user industries to benefit. India has however not benefited from these falling prices due to a weak rupee, slowing demand and poor investment climate. Our companies are paying the price for the failure of the government to create the right investment climate quickly. This has depressed corporate earnings and distorted the actual cost structure of Indian business. As commodities have seen its sharpest fall in global prices, India’s macros are set to improve significantly. The picture of our corporate earnings will look very different from now and earnings expansion is set to accelerate. An earnings upgrade cycle has already begun and this is only going to gain momentum. Production, however, has not grown fast enough and will still take time. When production grows at a decent clip, Indian equities will become the toast of the global markets. For now, the businesses growing production refutably will trade at a premium. But, the real story maybe in companies which created capacity early and are struggling to grow now.
“A man who wants to lead the orchestra must turn his back on the crowd” – Max Lucado.