Another Big Short? Michael Burry’s new bet may not be a big worry for India

Though, this is not a naked short selling and has a limited loss potential – up to the limit he spent buying puts – Michael Burry's track record and position size signals his conviction.

Michael Burry of 'The Big Short' fame, who made millions betting against the United States housing market during the Great Financial Crisis in 2008, has now taken large bearish positions against two key US indices — the S&P 500 and the Nasdaq-100.

In a regulatory filing, Burry's Scion Asset Management revealed last week that it bought put options for the SPDR S&P 500 ETF Trust, and the Invesco QQQ Trust Series 1 ETF, which respectively track the S&P 500 and Nasdaq-100 indices. Scion's bet is worth a total $1.6 billion.

Though, this is not a naked short selling and has a limited loss potential – up to the limit he spent buying puts – Burry's track record and position size signals his conviction.

The US market has not reacted to this revelation. S&P 500 and Nasdaq-100 delivered positive returns over the past five days, including heavy buying on August 23, buoyed by stellar earnings by Nvidia. However, concerns over inflation and interest rate have not yet abated.

One should keep in mind that Burry had taken short positions in January this year as well citing unsustainable valuations, but admitted later that he was wrong as the market did not move favourably. He blamed the “BTFD generation” for this. BTFD expands to 'Buy the F*****g Dip', a phenomenon where investors have resorted to buying every dip in the market.

So should India be concerned over Burry's moves? The domestic market community doesn’t completely disregard his views, but also does not read too much into it. The Indian market has outperformed all major markets in recent history.

Bloomberg data shows that since 2020, the Sensex has delivered annualised 8.8 percent returns (in dollar terms), beating the likes of CSI 300 (China), Topix (Japan), Hang Seng (Hong Kong), Kospi (South Korea) and ASX 200 (Australia), by a wide margin. This outperformance has come on the back of a resilient economy and heavy domestic inflows, especially from retail investors. This has also negated much of the foreign selling whenever that has happened.

Meanwhile, the S&P 500 has delivered 16 percent return so far in the current calendar year, 7 percent in the last one year and 54 percent in the last five years. Sensex’s returns stand at 8 percent, 11 percent and 68 percent, respectively. These returns are in local currencies.

“India is not decoupled,” said Siddhartha Khemka, Vice President - Head of Research (Retail), Motilal Oswal Financial Services. “If the US market falls, Indian stocks will also fall as it will dampen the sentiments and lead to FII outflows.”

He also said Burry’s position shows his personal views and there will be several investors that might have taken a position countering his views. "So, will it fructify or not, is a difficult thing to tell. Thus, saying that it will lead to a sell-off in the Indian market, is stretching the argument too far," Khemka said.

It should be noted that Burry has also taken long positions in some select stocks, his filings reveal. These include Stellant, Discovery, Expedia, CVS, MGM Resorts, Iheartmedia and Cigna – signalling that he does not see bleakness everywhere.

Even Burry’s peers in the US, including Kevin O’Leary, have shown their scepticism and argued that the current situation is much different from Burry's huge short that made him famous in 2008. Some also accuse him of being a one-trick pony. How right they are may be debatable, but it does not deny that valuation of US indices are above their historic levels. The price to earnings (PE) ratio of S&P 500 stands at 25.32, higher than the 10 year average of 22.94.

Though concerns over valuations are also being raised for Indian stocks, most analysts are bullish for longer term given the superior economic growth and consequent earnings growth.

Kranti Bathini, Director - Equity strategy, WealthMills Securities, a boutique brokerage firm, said Burry’s past successes does not mean that his bet will be successful this time as well.

“That is his perspective and investors should not get carried away by that,” he said. “Longer term investors need not get worried over these views.”