Dear Indian Investor

Tis the season for the Q3 quarter ending investor newsletters from hedge funds and man some of these newsletters read like a confessional. You can check several of the hedge fund newsletters that I have collected from the internets…TPG-Axon, BAM, Cerberus, Greenlight Capital, Tosca and Perry.  The newsletters follow the same basic construct by being broken down into 3 parts: 1. Holy crap this has never happened before 2. Highlight specific stock or sector plays 3. The path forward (usually a plea to the client to not bail out of the fund).  In the same spirit, I bring you:

Dear Indian Investor,

Wow…what a ride the “India Shining” story has been.  The peak of the Sensex was around 21,000 at the beginning of 2008 and here we are at 8,500 a drop in the neighborhood of 59%. So what happened, I know most people didn’t expect it…bullsh%^. I believe people were not incented to look at the downside, we all became cheerleaders for the Indian growth story. I’ve been here for the past 3 years and kept on scratching my head every time the Minister of Commerce & Industry (Kamal Nath), Finance Minister (P. Chidambaram)  or Prime Minister (Manmohan Singh) would talk about 10% GDP growth.  Most people you talked to couldn’t really tell you how the 10% GDP growth was being achieved, they looked the other way because in the other direction was their portfolio sky rocketing. They sadly correlated stock growth with country growth, I kept on telling people that the governement had a window of 12-24 months to get it’s act together and I firmly believe they have missed it.  During the World Economic Forum in 2007, India was the toast of the town…the girl everyone wanted to talk to.  How things have changed, back then India laid down the guidelines for Foreign Direct Investments (FDI), telling who and what they could invest in.  Now, the government is pleaing for anyone to invest.  I can tell you companies like Starbucks are probably not looking to enter India anytime soon, they have their own issues to deal with and getting “back to basics” – entering a foreign country is not part of anyone’s back to basics restructuring plan.

Some of the sectors that are going to get hammered: real estate, infrastructure and aviation.  If you have been following what I write then you know my feeling about real estate, it’s very bad. The dynamics maybe different this time, but the outcome will be the same – over capacity and over leveraged.  I just hope we don’t come to the same scenario we had in early 90’s in Bombay, where developers got shot because they couldn’t pay up. The Indian government in early 2008 threw around numbers as big as USD 500 billion being spent on infrastructure, that is clearly not going to happen. Banks such as Macquarie and Depfa that were known for large scale public-private partnerships are no longer lending money. Depfa, which has an office at Ceejay house, was the main culprit in creating a massive hole in the balance sheet of commercial property lender Hypo Real Estate.  Aviation was another great growth story, many new carriers and low priced fares fueled the spike in traffic.  A year ago Air Deccan, Sahara Air, Kingfisher and Jet Airways were all competitors and fighting each other for business.  Just a couple weeks ago Kingfisher and Jet Airways announced a partnership to work together (read – control prices), the other two airlines were acquired by Kingfisher and Jet, in affect these 4 airlines now control 60% of all flights in India.

Looking forward I see some great businesses created in this period, but on the whole it’s going to be a very difficult period.  I have recently rediscovered the tale of the “Tortoise and the Hare.”  Had you invested in the stock market 3 years ago in India and stuck with a Sensex Index fund you would be about even.  Had you put your money in a fixed deposit (similiar to CD’s in the US), you would have averaged 7% a year…slow and steady wins the race.  I believe the US is going through some large scale structural changes and things will not be the same as they were before and that will affect India.  The impossible is now happening: Goldman is now “just” a bank, Lehman is nothing more then a website, GM and Ford are on the brink of bankruptcy, the list goes on and on…what’s in store for India?  I believe we are going to see some major bankruptcies, a flood of people coming back to India due to H-1B visa’s being revoked and a general deceleration in the India growth story.  The Indian government is stuck because it cannot spend it’s way out of a recession/depression like the US. Cash is king.

Happy Diwali,

Manish R. Jain