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(Interview Transcript)
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Samir Arora of Helios Capital feels that, the investors are giving too much importance to waiting, for the so-called ‘bottom’. He said that he has not changed his sector preferences in the portfolio from last year, nor is he worried about a further fall, The key, Arora said, is whether to buy or not.
He said that the odds are against the market correcting at around 50% from the peaks. The domestic institutions need to show some more conviction in market, Arora said. He believes that the FIIs are staying away due to the complete lack of domestic participation.
Excerpts from CNBC-TV18's exclusive interview with Samir Arora
Q: Is this indeed a bear market?
A: Catching a bottom is more of an ego trip than anything else, and investing is not about ego and saying that I have invested in the bottom. The question should be that if there is going to be a bottom in some days then how far we are from it and I don’t think anybody would be able to say, that we are very far from it in terms of percentage if we have not already crossed it.
Q: So you don’t agree with people who believe that there could be another 15%-20%, downside tot his market from say a rough 15,000-15,500 levels?
A : If that happens then it would mean that there are some major issues around the world which could take us there, and its very difficult to say like that, but the odds would say that that is not the case anymore and if it did happen then it would happen for extremely short period of time. As of now it is a bit unreasonable to think that the market should correct 50% from the top.
From the February 2000 till September 10, 2001, it fell only 35%, unless you think there is another event like September 11.
Generally, a 30% to 35% fall which we have seen not from year to date but from the highs of 8th to 10th January. It is not a fall after you start worrying about, whether there will be further declines or not, but whether you should buy or not is another question, not that it will be another 15%-20% but normally it doesn’t happen.
Q: Do you think it might be a sharp recovery this time or do you think the events are stacked in such a way that it might just drag on for a bit longer before you get anywhere close to where we fell off from?
A: Right now, it looks unreasonable that there will be a sharp recovery. We have a sovereign fund as an investor at the end of this month. Investors want to look at whether they will lose much more by being in India from hereon, not that whether they will make a lot more. That is how the rally will start or the markets will get attraction of the world. Investors, after a month or two of stabilization, would say it doesn’t matter whether they make a lot of money or not. They will be a little bit more comfortable if they won’t lose a lot more?
Right now, the way the world is stacked, investors are investing in these markets to say, “I can wait for 5-6 months, but don’t give me another March or January”. Those prospects look less likely now. If for no other reason than the fact that the markets have already fallen a lot.
Q: What’s happening with the global money, its true that they haven’t pulled out a lot of money, but one would have expected that after a 30% fall for a market like ours, which people seem to like quite a bit till December, they would have bought a little bit more, what’s keeping them away you think?
A: What’s keeping them away is the complete lack of backbone of the Indian investors; we know that the HNI’s in
I don’t know whether to laugh or cry. Mostly I laugh, sometimes I cry, and then I see heads of Indian mutual funds who do single country and have billions of dollar invested in India. They are very bearish because of this reason and that reason. Despite they being bearish in each of their funds, they have 90% invested in the markets, which means that they have USD 5 billion invested in the market.
Who is their target audience? Who are they trying to please? Is it to protect the 90%, which is USD 5 billion invested in the market, or to show their smartness to the world to say that we are very bearish and cautious? If that is the case, stay at home because your first priority is to the guy who is paying you the management fee. It is not to the viewers of CNBC that you come and show your intellectual thinking.
I am totally confused that Indian institutions and fund managers are worrying about the 10% that they in have cash, rather than worrying about the 90% that they have invested and are not trying to increase the value of that.
From a foreign investors point of view, slowly they will come in as they find that the market is not falling more. They will not necessarily wait for the market to go up. Unfortunately, the market fell again in March. Right now, I tell investors that you can wait for results, wait for 1- 2 months. As it stabilizes, they will come back and then you will have progress and rally. But may be not a V-shaped rally because that needs a different environment. You need two hands to clap and right now the other side is not participating.
Q: What’s yours sense of when we might sort of begin to get out of the woods when the market will not trade with such thin volumes, complete apathy, no flows, this kind of a situation might get arrested?
A: We had it once before. In 2002-03, it had such a big pop in the end. For example, there was an article in the Wall Street Journal titled the lost decade. In 1998-2008, the Dow has gone flat. This is a complete nonsensical analysis because investors normally don’t invest at one point of time and then never invest again. So, it is wrong to think that if you invest in 1998 and still now have made no money because that is not how the markets would invest.
My feeling is, by the ways of more of retail driven analysis but I even try it on institutions and it works most of the times, is that if you look at the market its not for the institution but more for the retail. If you look at the market as a source of making money, it will not work because what happens in India, as the HNI says that I will invest so much money every year out of my options trading and futures trading, I want to make x% returns, but if you look at the market as an investment, that means you keep investing and over time you will make money, always does right Now the problem is that we are all now looking that we must invest only in the bottom not one week or one month before.
In India, the problem is that all of us spend too much time in saying that it should immediately come to the bottom. When I was at Alliance, I used to tell investors at roadshows that if today a bull run started, you should be the unhappiest guys if you have 3-10-20% invested in the market out of your portfolio of 100%. In theory, you should be unhappy that you had only invested 10-15% and the market has gone up so much. Right now, the problem is that we are all looking at invest only at the bottom not one week or one month before.
The market will go up when it stops going down. I can see in my limited fund, that I would have received at least 20 emails in the last 15-20 days, from institutions we had met 5-6 months and one year ago and to our mailing list and all, for our monthly letter saying we want to look at India, tell us what you have done and the market has done, what are the opportunities, some of them may and some of them may still not invest but it is on everybody’s radar.
Q: You are not worried by earnings slowdown then or other prospect of it aside of this derivative issues. Do you think core earnings could slowdown? Is that a risk or do you think that too is overdone?
A: The thing is that we are into the middle of the earnings season. In three weeks, everything will be out. What is the point of speculating today? It is 2-3 weeks away, so there is no point.
In fact, the decision-making for many of the fence sitters will be after the result season. As of now, the fall in the market is 35%. That initial expectation was for 17-20% earnings growth, that in some sense is not very much in doubt. How can you doubt the earnings of BHEL which has five-and-a-half years order book?
According to me, it happened because there was a change of Chairman at the top. In PSUs, every time a new chairman comes, they come and try to start from a low base. Who knows what the answer is? But to think suddenly that the world has changed for companies, which have order books of 3-5 years and to hit a stock down 20-25% in two weeks is just waste of investors money.
I don’t think that Indian and foreign fund managers, but mostly Indian, invest in their own funds. One question we should ask all fund managers is how much money they have in their fund, and would they trade like this? Would you sell a stock down 25% because you felt that the earnings were 3% lower or 2% higher, knowing that the underlying demand for that company has not gone away? If that were to go away then there is no future for India?
Will anybody personally sell a stock down 25% because he feels that something has got slipped into from one quarter to another in terms of either some provisions, or some delays of March 31 order going to April 2. Will any normal fellow do it with his own money? They only do it with other people’s money.
Q: The other big bugbear for the market or the one which is worrying the market at least is commodities, inflation, and the prospect of policy reaction being unfavorable for the stock market. Is that a legitimate risk in your eyes?
A: Yes, that is a legitimate risk because you know my thesis, anything where government is involved is a risk, so that is a risk which even I have to negotiate that they may overreact. In terms of commodity, one is a policy risk. That is always been there in India and that even I am a little bit scared about. The other thing about commodity prices in general is that India is not the only country which has high inflation. In Singapore, the inflation about two-months ago was less than 1%. Now, it is about 6-7%. Similarly, in every other country. I still don’t feel that India deserves to be one of the worst performing markets in the world because of the basis of inflation as the whole world has had that increase. Look at Europe, where after some whatever 30-40% currency appreciation still they have very high inflation. Look at Indonesia, Singapore or China, everywhere the inflation is very high relative to what it was 4-5 months ago.
It is not an India only problem. On the other hand, the policy risk in India is higher because you know what I feel about our policymakers. So, that risk is there but on commodities separately there is an inconsistency, which large funds are getting that in some sense. There is an inconsistency between the prices of commodities based on the growth rates of India and China and secondly the dollar is going to zero. Mark Faber comes and talks things like that in our lifetime the dollar will go to zero and therefore you should buy gold, which he says will go to USD 3,000. This means he is saying it will go to zero because USD 3,000 is equal to 3,000 x 0 because dollar is going to zero.
So, that kind of a thing where people draw extreme scenarios and say that this is like 1929 for US. That means people will not just sit on their table and say this is becoming like 1929, so I hate all people. I hate all equities and only want to buy commodities like gold. Therefore, if suppose you had two scenarios for US which is the main starting point in these days of all this conversation. Will the US survive and sort of recover in two quarters and move on or that US will have a very bad outcome? If the US is going to have a good outcome, then it is possible and we don’t care that US outperforms emerging markets or under performs but that it cannot be that the US does well and we are all falling. Right now, that is what is happening. We have a negative beta.
On the other hand, if US are going to have a bad outcome, then the world has to for that scenario also look for alternatives and those alternatives cannot only be copper, steel, aluminium and gold. It also has to be non-US equities and therefore in both these scenarios, at least India should on a relative basis first pickup. I always say it will be determined later but to be the worst performing market in more or less the world, is more to do with the Indian investors and in this case I don’t blame the Indian individual investors because the Indian HNIs have been wiped out and Indian small scale investors have actually invested in the funds. It is the institutional investors in India who are showing complete lack of leadership and even independent analysis of their own.
Q: There is one fear, which a lot of people have which is leading up to the RBI monetary policy this time that the RBI after looking at the inflation numbers will raise interest rates once again. That will stifle growth, some more which will trickle down to earnings deceleration. Do you think this scenario could play out? Does it worry you?
A: That’s what I am saying, this scenario cannot be completely wished away or completely analyzed. One risk that our policymakers may be relying too much on is trying to show to the world that they are showing action. So, that risk is there. Its like any other risk in life and one can wait for April 29. I will not overly say that that risk is not there because that’s the history of our country unfortunately.
Q: Most people watching you would be individual investors. I am not asking for advice for them but in their shoes what would you do, would you wait for another few weeks, watch earnings, watch the monetary policy, and then start buying stocks in good sectors or do you think this is as good a time as any to start?
A: First, this is as good a time as any. But in theory a small investor who is watching this and if that is really the audience, they really are not going to put everything together in any one day anyway. Even if you had followed what we had said in February to start investing, you would be down 8-10% on whatever you may have invested, which in theory would be from your monthly income.
These investors should do systematic investment because that is the easiest and it always works, up and down market mostly it will work. But the problem is that they invest systematically in the fund and the fund then tries to market time.
Q: There is one feeling which has been bolstered by the moves of the last 3 months that maybe the underperformers of last year will do better this year as they have like, IT, FMCG, Pharmaceuticals, do you think that’s the way it will pan out, as the over-ownership unwinds or some of the good performing sectors of last year could bounce back?
A: We are not changing our sectors. In IT, we had a little bit at the end of December. My theory is that these sectors that are doing well. I don’t think it will satisfy new investors. For a stock to be 5% is not why a new investor is coming to the market. A new investor is coming to the market in theory to make money not to not lose money.
Today, if somebody came into this market, why would he buy a stock that is up 45% against the index in the last 30 days, which is the same mistake you would have made if you had come into another stock last year. So, that trade is only a trade again with other people’s money. I would love to ask the mutual fund managers whether they would buy Indian consumer companies or the L&Ts and all that stories of several years at these valuations today.
India stories are the under penetration and shortage of infrastructure, financials, market share gains of private sector versus the public sector in different stories.
So, how can stocks whose main growth avenue comes from expanding and the rural be good only because their earnings are a little less volatile. Therefore, in a sector rotation in a short period of time, they don’t fall and therefore they are viewed as the new sector.
We are not changing our sectors, we are remaining in the sectors of last year. We are not in real estate and that will not be in a sector even this year or the following years. There is nothing wrong with other sectors such as capital goods, infrastructure, and financials.
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