Indian equities have corrected enough and are in the midst of a sustainable long-term run, compared to countries like China where shares have seen a ‘poor quality’ rally.
That’s the view of Samir Arora of Singapore-based Helios Capital, who told CNBC-TV18’s Udayan Mukherjee he has upped the net exposure of his long-short hedge fund by 5-7 percent. (Arora’s current net long exposure is not known but in February this year, he said his position stood at 63-64 percent.)
“As opposed to 2014, which was a long-only year, we expect this year to be long-short,” he said, while maintaining that investors should expect 12-15-18 percent kind of returns from stocks this year.
On the issue that has had investors most worried, Arora said that even if earnings were muted in the current fiscal year (at about 10-12 percent growth), they will likely make up for it in the following year and that on a 2016-17 basis, shares were priced at a reasonable 16-17 times earnings.
“The big picture story remains that India has witnessed a serious change in interest compared to the past five-seven years,” he said.
Excerpts from the interview.
Q: What is the current view on the market?
A: We have increased our net exposure a little bit by 5-7 percent. However, my bigger picture thesis remains that some sectors are quite okay and you can say good but some sectors are very bad in terms of a stock market expected performance. Therefore, we call this as compared to 2014 which was a long only kind of environment this is a perfect long short kind of an environment.
Q: Do you think markets have corrected enough or do you see this market drifting down lower?
A: At a market level, I think it has corrected enough. I feel that one of the bogies was this minimum alternate tax (MAT) issue which was created by the government and then hopefully now little bit resolved by the government in terms of its scope. However, I still feel it a bit sad that when the Finance Minister and the Junior Finance Minister keep emphasising that India will 21st century management of income tax not just the policies.
Every now and then somebody brags in the press that how they can go after the foreign institutional investors (FII), how they can go and pursue six years. Maybe they can but I don’t think India or anybody should be bragging about these things. You may do it some levels okay what can be done but to go into media and say that it is allowed and it is our right and it is our policy – there is no need.
Even today it came in the paper from unknown sources, people who can’t talk openly but still go and brag about it that it is their sort of birth given right to do it. Whether you do it or not is, whether it is allowed or not, it is not right conceptually. Legally if you want to do and it can be done there is no need to brag about it.
Q: What about India’s recent underperformance relative to other emerging markets, I know it is a very narrow period of time to gauge it by but over the last few weeks we have underperformed quite significantly, is that creating any kind of strain or any kind of impatience amongst global investors you feel?
A: I don’t know that because we are India oriented and there is a lot of interest in that. However, it is possible that for somebody who is Asian Fund Manager or Emerging Market Fund Manager seeing the difference between the performance of India versus say China, Russia, Brazil, even Asia-Ex Japan that they may try on the margin to allocate from here to there to try and catch that.
In a big picture sense anybody who moves around this fast is going to be a loser and that is why most of these funds underperform. Last year when India was doing well, they would be trying and bang money into India and then suddenly when China is doing well they try if they are trying to reduce here and go there. In a big picture sense for somebody who is coming completely afresh India looks a much more sustainable rally than China that looks like a poor quality, nobody knows why it is going up, the earnings PEs are very high, I think it is a poor quality rally.
However, still people on the margin who are already in all these markets maybe still trying to catch a bit of that because it is a big part of the index. However, I think India is high quality there is a lot of interest. We are also seeing a very big change, not from last year but from previous five-seven years, very serious change in interest.
Q: Having said that 2014 was a spectacular year both for the market, for your own funds. 2015 has not started on a special note, do you think it might end that way being a lukewarm kind of a year paling in comparison to the previous year the way earnings have led us so far this year?
A: There is not question that you cannot have a 2014 type again. We have had only three or four such years in our life which is 1999, 2007, 2014 and or two other years when I was in Alliance. That was way beyond what anybody expected, in fact it makes people nervous when it is so good. So, the expected return is 15 percent and 12,18 percent in dollar terms. This year we are on course for that, we have already achieved that actually even till today but the point is that that kind of a return is what people are coming for. If they get more it is a bonus but there is no comparison with last year.
Last year was a gift which many people refused to take but now it is harder but it is a good market right now and all the changes that are happening are happening and some which are not happening pure and simple shameless politics, that also will get sorted out plus minus 5-6 months, three months here or there because there is a limit to how much you can be proud of the fact that we have blocked the this bill in parliament and how happy we are that we blocked something which we presented-you can say that BJP did the same thing but the public is not interested in the tu-tu main-main between parties and acting happy and proud of these facts so these will get done. If they can’t see the momentum in favour of many of these changes, the people who are opposing them will lose.
Q: Let me ask you for a candid answer on this one though on earnings because we have been discussing this recovery in earnings for quite a while now maybe almost a year. Is it frustrating you that there are still no great signs of an earnings pickup, something which the market is beginning to look a little overwrought about?
A: No I am not because the thing is that first of all as I have said again and again, concurrent earnings don’t matter, your valuation should have become very high then you can question. Right now if you are look at it our PEs must be in the range of say six because one year has also passed and so today if we look at 2017 or 2016 earnings they are like 16 or 17 times.
Now you can say that this year earnings grew- by the way even now this year’s earnings estimate from the market are about 15 percent which is not very bad, let us say it comes out to be 10-12 percent, my feeling is that if earnings this year are lower, which they could be one or two percent here or there, it will make up in the following year.
Q: There is one thing which tops your list of worries about India now, what is it?
A: My worry is that this politics is taken to a stage where half or one third of India is feeling proud and gaga over the fact that they have stopped legitimate things and no other reason is given except that they have also did the same thing to us. I hope that public doesn’t accept it.
Right now I think that everything that was to be delivered other than these two things which are going on GST and Land Bill, most of the other things that government should have done have been done. Now there is the implementation of that but more than that no shooting ourselves in the foot by acting tough against the world; there is no need. It is not that it is a sign of jingoism or something, there is no need to not respect people who have put USD 300 billion into India and make it look as if they had no other choice.
They had choices but it is a two way thing and it is not just that, that Fund Manager Group doesn’t have anything else to do in life so they put money in India. It should be respected for the fact that it has stuck in bad times and comes in and believes in it more than Indians do. However, in a big picture sense, these days what
I tell everybody and I gave talk on this in Mumbai few weeks ago is that if you look at equity markets in India or the world and I that time presented more than 200 years of data that equity markets in general outperform fixed income by 5-6 percent per annum and this has happened over 100-200 years, 20 countries, everywhere including India also.
So, believe in that and although these days flows are high but foreigners have believed more in that than the Indian public has believed and we hope that Indian public does it. However, don’t be disrespectful to the foreigner because he believed in it and believes in it and has supported India at every stage.
However, otherwise I don’t think there is currently a very big niggling factor in my minds but I hope that at least GST first round gets in and then obviously it will still take a year to see that all whatever state governments have passed and all that but we can see some progress and everybody will be happy. Otherwise everything is going quite okay; nothing so wrong is happening in India for us to be hyper negative or sensitive about it.
Q: Coming to stocks, what is the view on ITC?
We have never owned it and we mostly not shorted it. I have no view on it, it looks cheap and all and actually if I look at because I mostly draw my conclusions from what happens in the US which is the proper market, India is just a copycat market. No independent thought is put here so in US those have been very good stocks both PMI and-that is Philip Morris International and MO but somehow we haven’t owned it here. It looked a bit too much market cap too soon, too much dilution to employees, maybe 20 percent of the companies owned by employees which looks to me in a consumer company a bit obscene so we haven’t owned it and we haven’t shorted it also. Actually we missed it, we should have shorted it before the Budget but didn’t.
Q: Let me ask you about one sector which you do own or traditionally have owned quite a bit of, private sector banking. Last quarter there was a wrinkle with ICICI Bank, this quarter too there is some asset quality trouble but Axis was quite good and there too in pockets valuations have expanded quite significantly but in some names. How have you approached this sector over the last few weeks?
A: No, we have all of them, in fact we have Axis Bank a lot, we bought yesterday also and so we have, all those names we have. We had them last time also, we have them now also. Maybe we have added one or two percent here or there but we have nearly all those five six top names all of them. Together must be around 25-28 percent or something, maybe 28 percent.
Q: Has your short list changed from the time we last spoke because you had metals, you had real estate, you had public sector banks in your short list but have you changed that or added to that since we spoke last?
A: We have telecom but in general we covered the real estate one this month because it fell some 24 percent in this settlement so we covered it two three days ago but generally we will be happy to reinstate it if it tries to go up a little bit.
Q: What about sectors like cement which some people are very bullish on, others find it very expensive, or pharmaceuticals where there are very high quality companies but some of them are again 30 plus P/E multiple, how do you approach these two sectors?
A: Cement we don’t do, we don’t have wither way, it is a bit complicated because also if I want to short them they are very liquid and long we don’t like all these commodity type names. We don’t like all these things that we are a cartel so what a great thing that we are doing, we don’t like all that. Now coming to pharma, actually we didn’t have much before we have bought this part of this deal that happened, little bit because it looked like that day a good discount, let’s see. It is coming in to the Financial Times Stock Exchange (FTSE) index on Monday, maybe somebody will buy it that day.
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