In our blog of 31-Oct-17, we referred to the fact that our equity portfolios (we call them risky portfolios) benchmarked against either the BSE SENSEX or the BSE Small Cap index had been significantly underperforming. In the same blog we had talked about the exuberance in the small cap space and our skepticism thereon. The Small Cap index nevertheless continued to rise for a few more months and reached its peak of about 20,000 in January 2018, following which it witnessed a drop of 35% over the succeeding 13 months. The Small Cap Index is currently trading around 13,600. While our skepticism in the blog of 31-Oct-17 was proven correct, our stock picks too dropped (though not as much). We are happy to say that now our risky portfolios are steadily recovering from their earlier underperformance.

It is now about 16 months since the 31-Oct-17 blog and it is surprising how things have witnessed a 180 degree U-turn in this rather short time span. What has changed ? The striking change is a compression of earnings/book value multiples. Even more surprising is that, earnings and/or book value multiples (at-least for our basket of stock picks), are witnessing compression while earnings are growing. One would expect the reverse – i.e expansion of multiples as earnings grow. Of-course, the compression in multiples could mean that the market is reading our stock picks as duds and that may very well prove to be right. Nevertheless, in our opinion, some compelling investment opportunities have emerged as a result of this dichotomy between earnings and multiples in our basket of stock picks.

It is quite possible that stock prices and multiples could witness further compression – that is the nature of markets. In our opinion this would only reinforce our conviction to buy. With the general elections round the corner, days of volatility are ahead. Volatility is our friend when we have optionality on our side. Optionality in our language means cash. As multiples have been compressing, we have been steadily deploying cash in investible opportunities over the past few months. Many client portfolios have now significantly lower levels of cash, and I would urge those with spare cash on the side to bring it into their portfolios for us to deploy into the investible opportunities that we see – of-course while operating within the limits recommended in each client’s Investment Policy Statement.

I may be completely wrong, but I read the current scenario not very different from that of September of 2013. The Small Cap Index then was at a local low and had significantly underperformed against the BSE SENSEX since the March of 2009. Multiples were compressed and pessimism was rife. With 10/10 hindsight, it was an opportune time to make investments in September 2013. I believe that opportunity exists today.