Despite all the negative news pouring in from the economy, foreign investors have not washed their hands off the Indian market yet, which leads Samir Arora of Helios Capital to believe that they may not be overly pessimistic on India.
In an exclusive interview to CNBC-TV18, Arora points out that Indian markets have not fallen drastically in 2012. “In rupee terms we have gone up 8-9% and 3-4% in dollar terms, so the fact that you haven’t lost a lot of money is being felt by investors,” he said.
He goes on to say that the world is currently in a forgiving mood because investors have not been pained much by equities.
However, he agrees that it is high time the government takes a step towards reforms and making policy decisions which will help the economy, because reasons for the market to rally are running out.
The Reserve Bank of India has indicated that the ball is now in the government’s court to help boost the economy. Rating agencies S&P and Fitch have also put out warnings. Arora says “the government in some sense is getting it from every quarter, but they are not getting it in the end themselves as to what they should do.”
For the short-term, he believes it is a make or break situation for the country and the market, but has a more optimistic view for the long term.
Below is an edited transcript of his interview with Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying videos.
Q: How are you positioned now - bullish for the next few weeks or bearish?
A: Mostly tired, but if I look at it from a portfolio point of view, more bullish than I was say five-six months ago.
Q: You think that’s how the market is going to be as well – tired and range bound?
A: I think so, but I have discovered that I am more an optimist than a pessimist, so I even draw hope from the fact that Indian government has started taking action. For example, yesterday the Prime Minister actually gave a speech on the economy, but of course he didn’t give it in India.
The point is that if you overly look at the government everyday, it is very frustrating, very depressing. So I am no longer overly looking at them. I have bought some stocks; I have shorted some of these things, but on a broader level I don’t go into the office everyday thinking of what is bad in India per se because it is just irritating. While stocks may not make you multiples, but if they give you 5-15% in a bad time, that is enough. That much also is very difficult to make these days.
Q: In terms of liquidity, indications are that people are working with much higher cash holdings now. Do you sense that exhaustion with money as well, are people priming themselves for some kind of make or break move coming in the next couple of months?
A: In some sense it is true that all the excuses that we had for this market to go up are one by one running out. We might have the last round dependent on the presidential election and if the government will do something about that.
For example, look at what happened yesterday when Fitch warned of a downgrade in a few months. The Finance Minister said that he rejects this. Imagine if he started rejecting anybody who criticized us. What if the mutual fund guys tell their operations to reject anybody who wants to redeem saying that this is based on last year’s performance whereas the last three days they have actually outperformed or something.
The point is we are at that edge where if they are forced to act. It would not matter how we came to the situation where our Prime Minister goes and tells the G20 that the world should take creative solutions to help the world economy. But if somebody had raised any questions, there would be no answer for what we have done to help the world or even help ourselves. So we are on the edge, and maybe that’s why people have cash because they think that this is a make or break situation. In a short-term sense it is, in the long-term sense I am not so pessimistic in life.
Q: Is RCom in your list of shorts and have you read that Veritas report?
A: Normally I only talk about a few stocks, not every stock that we have, but we are definitely interested in this stock.
Q: So what did you make of the Reserve Bank’s action and what are your expectations of how much of a trigger it can be going forward for equities this year?
A: I think the government in some sense is getting it from every quarter but they are not getting it in the end themselves as to what they should do. I must say that on Wednesday or Thursday I didn’t even realize that these were the expectations. So these expectations really maybe firmed up over the weekend.
Yesterday it looked bad, not from what RBI did but just from the fact that at the end of the day the world was up 2% and we were down 1%. That made us stand out even more which is always negative because it makes people question why we are here. But from a purely economic, stock market point of view, I think they did not do anything wrong. I remember the RBI governor saying the last time that he was led to believe that there will be a readjustment in oil prices. At that time we thought that this meant that he has been promised or assured, so if it didn’t come in two months, they were justified.
It’s the government which has to do something in the back drop, not by taking those specific stocks which may benefit from such government action. As I said, us fund managers are at the edge.
Q: Is your sense that the market will continue to grind during the second half or would you go with the opinion that this is the big troughing process we have been waiting for?
A: The thing is that it is a grind. For example, even when the Prime Minister says that I am going to ask for a meeting with some 10 industrialists and the stock market goes up 2-3%. If you thought that the market would go up only 10% in 8-9 months, that would still be a great return considering what is happening in the rest of the world and what people can make in fixed income.
The world would be happy if the market would go up 10-12%., but in a macro sense it would still look like a grind because it is up 10% after falling so much. But from that angle it’s not a grind in the sense that even if it goes up 10-15% by say next March-April it would be considered good return by the world. Therefore the hope and the excitement still remains and foreigners still invest because they believe that there is a story.
We always have this one angle that is left and that is if by coincidental forces our dear sister will be thrown out of the coalition and therefore something will happen. If it still doesn’t happen, people will not only become bearish but start walking away from this market. It would be only a one and half years left for elections and if you haven’t done anything by October-November then it will become much more serious.
Q: What are the chances of a Jan-Feb like global risk-on rally prompted by action from the US Fed and the ECB over the next few weeks? Do you think technically its possible?
A: Next few weeks not possible. But remember what the world now wants from Europe is that there would be a consolidated sort of a central bank kind of a thing where they invest directly in stocks. This when it happened in US was a big turning point in 2008 and it appears that the Germany and others are willing to look at it or are being forced to look at it. So any news on those fronts can easily turn this into a big 20% kind rally.
That is always possible, but best thing is not to bet on it. We want the government to take bold decisions, but we don’t take any bold decisions ourselves. The Indian investors who is in cash is not even putting 5% in the market wants the government to take bold decisions. The government does absolutely nothing, but goes to Mexico and says to the world that you take bold decisions. So the point is somebody has to start. I have done my bit by buying stocks in India, by buying personally stocks in US. I even bought Nokia yesterday at USD 2.51. Whole world can’t wait for somebody else to take decisions.
The point is that at the end of the day I feel that there are natural bulls and natural bears; there are natural people who buy stocks and natural people who buy bonds. Beyond a point there is no energy that should be wasted on people who have never bought a stock. We should go our way, they go on their way, and we see after many years who has done better.
Q: Despite all this bad news in India, we haven’t seen any incremental selling of any magnitude from the FIIs. Has that surprised you?
A: The point is that India in itself hasn’t really fallen a lot this year. In rupee terms it is up 8-9% and even in dollar terms it is up 3-4%. The world has very low expectations - not from India but from stock markets in general. The fact is that you haven’t lost a lot of money. Even if you came half way through January, you are down 4-5% here or there depending on the overall index. So there is no pain from that angle that is being felt by investors. The expectations are so low, as I was saying, so if the market goes up 5-10% you could get half a billion dollars.
That is one reason I was a bit sad yesterday about the RBI decision. I agree that it is actually government’s role and not RBI’s role, but it’s not really a cause and effect relation. It is like a Soros kind of an argument that it is all circular. Let us say they cut 25-50 basis points yesterday, which means the market would have gone up 1-2%. Then over the next 15 days you would get USD 500 million coming in, which would strengthen your currency, your deficit goes down 0.001%, some pending IPO gets done, some pending divestment gets done etc.
For everybody to believe that somebody else should take the decision is wrong. But I agree in a philosophical sense that it is more government of India’s fault than RBI’s, so they have a right. The reason the world hasn’t sold is because at the end of the day the market fall this year hasn’t overly pained everybody, especially because of how much it fell last year. So the world is right now in a forgiving mood because it hasn’t pained them so much.
Q: How do you approach some of the stars with which the market has had a turbulent relationship in the past few weeks, something like Tata Motors?
A: We don’t sell. We do as we would do with personal money, which is that you don’t sell a stock down 10% which is trading at 3-4 PE and with a dividend yield of 3% plus in India which is highest. We do own it, and it hasn’t gone up or fallen since we bought it.
It’s part of the portfolio because we need a few high-beta names, especially b we don’t buy metals, real estate or real infra. So we need a bit of high-beta in our portfolio and this is one of our five-seven names that we can consider high-beta.
Q: Stock price performance in the cement space has not been bad despite any monsoon concerns, price cuts, and cartelization fears?
A: No, I haven’t owned cement since 1993 even for one day. Currently we are short one of them; we are willing to short them on any news that there might be a big fine. Maybe it doesn’t work out, but for these kinds of things we are more willing to be short rather than long.
Q: How worried are you about growth because people seem to be fretting not just about local growth but global growth as well. In an environment of fairly tepid growth for the next two -four quarters, do you think valuations in India can adjust further lower?
A: No, I don’t have that as much of a fear. The market can adjust to growth rates if you give them optimism right now more than anything else. Our growth rate in absolute is still higher than others, whereas our stock market has been much worse last year and pretty much inline this year.
This is a game of hope. In the 1990s, we were optimistic in life because there was less of TV, less newspapers, so we didn’t even know what was going on with the presidential elections. We used to look at our stocks and a few sectors that were doing well. Now, maybe some stocks more directly connected with economy will not go up and maybe some of them will get into trouble, but that is why the government is so important. If they don’t take decisions because they feel that this will affect our economy five years later and we have elections in two years, everybody would have done it. But the market wants optimism and hope and that is not being delivered currently by the government.
Q: Are you getting the sense that people are overly worried about the currency? No one is really stepping in to do anything about it, neither the Reserve Bank nor is the government that vocally worried about it anymore. Is that impacting either performance or perception?
A: It has affected performance this year less than last year, but even I am not worried about currency. I might even send some money to my NRE account to earn 9.5% this month or so. Broadly speaking, it may go a little worse, but I don’t think that 56-58 to a dollar is sustainable. It doesn’t mean that it has to go back to 50, but it has to be in this range of mid-50s to 52, 53.
In the short-term, if there is a big panic, it might go to 58-59, but then it will come back. If you are earning 9% in India, you can handle 8% of depreciation because in US dollar you don’t even make 1%. Also remember that there are a lot of options available for the government. For example, right now to put money in Indian NRE, RBI does not allow NRIs to take leverage. All they have to do is switch that and so much money could come in.
It’s also right in some sense that you don’t want fast money which comes for a year, but in theory you can get in USD 5-10 billion with one line change which nobody will realize except all the private banks and the non-resident Indians. They will take leverage aboard. It will be their risk on everything except that from India’s point of view one year later if you have to roll it forward will their situation be right or not right. That’s why the government doesn’t allow it. But what I mean is there are many small levers like that for USD 5-10 billion which is all that today we worry about.