Samir Arora, Fund Manager, Helios Capital says the Indian equity market has rallied quite a bit and needs to pause but the pause always comes with a excuse.
According to him, liquidity flow could be impacted in the month of April because investors may not buy India on back of tax uncertainties.
Globally too, US also could see a bit of correction if it is seen that Donald Trump is not being able to push through his agenda and the corporate tax rate may not be 15 percent as he wanted but could be around 25 percent, and the NAFTA agreement could be negotiated in a softer manner.
On the earnings growth in India, he says one could atlast be able to see the 14-15 percent growth this year that they were always talking baout. Earnings could be good on back of firm steel prices, and the government supporting prices for many other commodities etc.
However, as a fund manager he is not comfortable owning commodities, says Arora, adding that he favours the financial space and within that he likes the private banks, insurance companies, brokers etc. He prefers Kotak Mahindra Bank, HDFC Bank, Yes Bank and IndusInd Bank but is not at all upbeat on public sector banks. He has also does not own any of the micro-finance space that they owned up till November.
He also strongly feels that in case someone is planning to take over or bail the micro-finance companies it would be negative for them too.
Below is the verbatim transcript of the interview.
Q: What are doing now? What is the positioning after such a strong rally?
A: The thing is that although it has been a strong rally, you have to say that it is also because there was a very weak November and December, so I am living on that that it is a rally which was needed but it is not like a runaway and out of control in that sense. So, our net exposure is still high. We are around 70 percent net. In our fund, we are always short some 30 odd percent. Sometimes it goes up to 40-50 percent. Right now it is about 100 long and 30 percent short for a net of 70 percent.
Q: So, has it been trimmed in the last few weeks as the markets have gone up?
A: Actually, I had become negative in December thinking that demonetisation was going to have a serious impact and that maybe it will take a few months for everything to come back. But fortunately, I climbed back quite fast, but still missed the first 10-15 days of January.
And since then, I have not because many things have changed. First is that, the world seems to be in a synchronous kind of a recovery where US is doing okay, Europe is doing okay, Asia is okay, China is not doing badly, in fact pretty okay. And secondly, in India, the flows went into mutual funds which we thought was a big picture long-term benefit of demonetisation, but not realising it will happen in a two-week period. And then we had to recover what we had lost in the first two weeks of January which we seem to have done this month at least quite stylishly.
So, it is okay now. Let us see how it goes.
Q: Are you feeling slightly dizzy though where the markets have reached because every market has gone up?
A: Yes, that is one big reason. India has gone up some 14 percent in dollar terms this quarter. But last year, it was down 4 percent in dollar terms. Maybe rupee terms it was 1-2 percent or something. So, it is not a runaway in that sense, but for the quarter it is good. But if I say, look at over five months, it is nothing.
Q: Sustainable, you think?
A: The thing is, as long as it does not fall 10 percent in a month, we do not mind anything. If it falls or hangs around here or goes down 2-3 percent, we actually like that because that is how we outperform because in a negative month, we do better than the guys who are long only and in the end, that is our goal. And it has happened for 10-12 years. So, a little bit of correction, we do not mind. A big correction, what happens is you may outperform, but in absolute, you also fall because still it is 70. So, that spoils one part of the story that you are outperforming but by losing less.
Q: How do you choose your shorts since 30 percent is still short? How do you choose shorts in a market like this?
A: This year, the first 1-1.5 months were very bad for the shorts. So, then we have to back off. So, then we said, we will short stocks where there is no event for two months. So, if you have announced a buy back and that even is over and there is no result, I can hang around and short you for the moment, because I do not only need protection or view that it has to fall, but I also need protection when the market may fall for some unrelated reasons.
Q: Which sectors do they belong to?
A: Mostly, they belong to the technology sector. 3-4 of them will belong to tech sector, some of them will belong to consumer, some of them while sleeping, while being awake, you can always short which are mostly state owned banks. And sometimes what happens is you start with only 1.25 and then you add half. What happens is even if they go up 10-20 percent, if you keep adding, at one point they will correct, you may not make a lot of money, but you will be able to walk away with the protection provided for free.
Actually that has been our thing. That is since 2009, the market is up in rupee terms more than 200 percent and we have had an average short of 30 odd percent of the book and we have not lost money. We have made money if you look at it cumulatively over that period, but that is not the intention.
The intention is in 2011 like period, 2013 like period, you make a lot of money and then in other periods, you have lost a little bit, but broadly you do not have to spend anything on Puts, you did not lose anything and you got much higher alpha because of it. So, our alpha is maybe India's highest because it reduces the thing without a cost. That is the idea.
Q: But you said IT shorts. You have any IT longs too?
A: Right now, we have one long for about 3 percent and shorts would be around 8 percent.
Q: That is it? That is a huge underweight relative to the sector.
A: That we do not see unless we are overly hugely underperforming, we do not look at what the index is and broadly, we have not done that for some time. So, I have not exactly looked at it, I know it is about 18-20 percent must be.
Q: So, you are bearish on IT?
A: No, we think that there are so many things happening that there is no need to be excited about it and maybe a little bit bearish, yes. For me, the short does not mean it has to fall a lot, but I want free protection against the market.
Q: How do you see this global synchronous move, because it has been about 3-4 months old now, 18-20 percent in many markets, do you see a speed breaker coming?
A: Yes, that can easily happen. India, you could say that some of the people will not buy in April because we wouldn’t know on April 1 if we buy, what tax should we be booking, are we to book 7.5 percent tax, so anyway everybody will take 15 days to figure out futures. If I do it in my own name, am I general anti-avoidance rule (GAAR) compliant or not, nobody has told me. I have to make my own estimate of whether -- so should I be deducing 33 percent tax or zero.
These are all things which will confuse the whole market for 15-20 days, arbitragers will be confused because one side will be futures which has no tax and one will be the cash if they will buy or sell. So all from India point of view, that can lead to a much lower liquidity in the first maybe a month even.
In a big picture, you can say this maybe timed along with the fact that the market has gone up so much that it anyway needs a pause but the pause always comes with some excuse which looks a bit more one-to-one – so on that basis, I thought.
Secondly in US we can see now that Donald Trump is having a bit of problem in pushing through his agenda, today they say that the North American Free Trade Agreement (NAFTA) that he wants to now negotiate is much softer. People may not mind that it is softer but that would also mean that he is not getting what he was supposed to do.
Q: You think that might trigger US correction?
A: I think that can do a little bit because I think now people will not believe that there can be a 15 percent tax rate in US, maybe 25 percent which anyway normally the corporate pay that much.
Q: What do you expect from earnings starting April? Do you see this year we are finally getting back to more than 15 percent?
A: We are very consistent. We have been saying that forever that we are about to get it this year but this year I think it may happen a little bit because if you look at the steel prices and all these commodities stocks which I do not own broadly speaking, but if you look at there, you can imagine that they were given a lot of protection in terms of anti-dumping and then there prices are higher and stuff like that so many of those could have massive swings.
Q: But it will be primarily commodity?
A: Yes, the earnings – how can private sector let us say financials, which is what we buy mostly, what extra growth can you get, little bit extra maybe HDFC goes back to 22 whatever it is, things like that are little bit can happen. The change will happen only in the sectors, which were beaten up that does not mean I want to buy them still because I think they have also gone up, it is not that they haven’t gone up. For one year, I think Tata Steel might be up some 150 percent or something. So it is not that therefore I am saying buy it but the earnings could change.
So I think earnings can do 12-15 percent.
Q: Why do you still steer clear of commodities and you have always never been comfortable owning them?
A: It is because when I do own them, right now I own one in futures, but I do not have the guts to buy even 2 percent and at the slightest panic, I will walk away because my heart is not in these trades.
I can hold many stocks even if they are down 20-30 percent or they do not go up for many years because we believe in that and we believe that we have some understanding of what is opportunity size, what is this company’s strength, in this company we say we do not know but supposedly China is cutting something, some production of steel, therefore something is up, therefore I will buy it. So you can go along for the ride which we try to do, broadly have never succeeded but that is how you survive for 25 years. You cannot survive by saying, I like only this and therefore I will sleep for the balance 21 years of my 25.
Q: What are your new bets – I know financials, don’t tell me HDFC Bank?
A: In that category, I have all the three-four, Kotak Mahindra Bank, IndusInd Bank, HDFC, Yes Bank. However I am saying the private sector banks, we have all the categories, we have insurance, we have brokers. In the banking side, I think the smartest guy is Kotak. On the other side, we own brokers, we own two-three housing finance and we own all the three insurance companies.
Q: Still no public sector banks?
A: Public sector banks we are short three of them for about 7 percent.
Q: Ownership zero?
A: Zero.
Q: Any non-banking financial companies (NBFCs), not brokers and all, the lenders, the Shriram Transport and the microfinance?
A: Microfinance, I used to own all the three of them till November. Now I would be happy to not ever have them. I have permanently shifted – in the first round when these two new companies got listed, we bought them on day one and we sold them in November and December but broadly speaking now that anybody who buys them out, I may even become negative on those companies.
Q: You are not happy with what IndusInd is pursuing?
A: If it is pursuing, we do not know but I would take it as a negative. Even though we own the stock. It will be a big negative.
Q: You were telling me about your other bets. You stopped at financials. What else?
A: In the non-financials, our sectors remain the same, consumer, auto and auto ancillaries, and a little bit of infrastructure. But that is not even infrastructure, that is these old road builders.
Q: But they have not performed.
A: One of them has performed. We were anchored in that and it is up 60 percent, so you can imagine which one it was.
Q: But not the vanilla Larsen and Toubro type plays?
A: No, that could be on the other side also.
Q: Any pharmaceuticals?
A: No.
Q: None at all?
A: No, we have only hospitals, no pharmaceuticals and this diagnostic chain and we are short two pharmaceuticals. Pharmaceuticals is very easy to make money on the short. The day this problem comes of US thing, do not worry about 8-10 percent because if you are broadly in the market on that day, it is nothing. Because, at worst, it will not fall anymore. But broadly nothing will happen to that stock for two years. Mostly, probably it will fall a little bit more, maybe another 5-10 percent, but it is very difficult to imagine that next day you will lose.
So, the first thing of shorting is do not think that you are making money. Thing is you are not losing money. It is a big highlight, why? Because randomly, our market falls 5-10 percent in a month, every 5-10 months. For example, in August, 2015 and then January-February of 2016, but if you ask exactly why it fell after a few days everybody has forgotten except that it fell. And in those days, these shorts suddenly give you 5-10 percent. And if they have not bled you in the other months, it is like you make 5 percent extra and that is what has worked. So, the intention in shorting every time is not that it will fall apart, but that it will not go up and bug you.
Q: What do you think causes the next correction, India-specific factor?
A: It could be monsoon type. There was this scare for one day.
Q: Big enough?
A: Not today, but it could be because then again the whole broadening of consumption and revival and it puts more stress. And we are talking about a correction, not a disaster. So, although we can say that monsoons now are easy to handle, easier because two years were good and water is there in reservoirs, whatever, but still it will be a sad thing because now we are starting to recovery. We were recovering in October. Now they say even currently sales are good again and again, you have one more event, that will be sad.
Q: Goods and service tax (GST)?
A: GST will be considered as a problem in a good thing. So even if there are problem, the stock market may not care. I will not care unless one specific something happens. But broadly, if suppose there is an issue of inventory, tax paid, not paid, all these things I do not think people will care.
In fact, one reason why the market may be getting so much foreign money this month is because they feel that now GST is on. GST is a very good theme which you can spin off the GST which is unorganised to organised and it is a valid theme. It is like tech was a valid theme for many years. It does not happen, in one month, everybody knows the theme because people then start discovering new names, they start slotting them in those categories. I think it is a valid theme.
Q: To be played through what kind of sectors principally?
A: Mostly, although we are not buying because of other issues, one could be building material.
Q: Plywood, paints and all that?
A: Plywood, paints even tiles and all these things. Otherwise, you can broaden it. I can even say in my diagnostic chain, I can say in my temporary manning, there are many which I own which I could, in my mind categorise them as unorganised to organised.
Q: Why are you not buying building materials though?
A: I thought because the real estate sector or the new start-ups because you need new in this. Only maybe 20 percent is to rebuild your old home or put plywood in a home which you bought. So that looks that – news homes or apartments, who is making? So we have not done it there and anyway they have gone up also quite a bit.
Q: Does it feel like a bull market kind of a situation right now or you are not convinced?
A: No, I am totally convinced. I was always convinced. Only the demonetisation confused me for a 30-day or a 20-day period. So, the first thing is we may call it a bull-run only if you look at our net asset values (NAV) of our funds or everybody's fund. But if you look at the index, it has not been a bull-run because there has been no index level rally. It has been a midcap rally since 2014.
So therefore I can always tell the world why are you calling it as if it is some peak of a bull-run, last year was negative, 2015 was negative, 2014 was up, 2013 was negative and in dollar terms, since 2011 it may be negative, so please do not say that. But in our heart of hearts, we know that we have enjoyed massive bull-run in the midcap stocks.
But therefore, I say it can happen, it can continue because there has been no rally in the index level for so many years. That is because 30-40 percent of the listed stocks which were in all these sectors, materials, capital goods, real estate and state owned banks were also doing badly. Now, their earnings may be good. Some stocks have also gone up, so we also have backed off from many shorts in this sector, that is why we went more into IT.
But, we are not going to go the other way so easily, not because we do not believe that the earnings will not come through, but we are not of that background to buy the pure commodity type companies. But people will buy them and may be it makes sense, who knows.
Q: When do you see a more inclusive bull market, not like the ones that we saw in the last three years where some sectors did very well, some very poorly?
A: But now I think it is already happening, that is why the shorting had to change because for us also in some sense, we bought those stocks by covering the shorts. Previously, you were asking how to make money on shorts. For three years it was very easy to make money on telecom. Even that became a bit more difficult now with all these things.
Q: Have you changed your mind on that sector?
A: So, we covered and then.
Q: You got long?
A: No.
Q: Reinstated shorts.
A: So, the bottomline is there is always something where you can afford to do a bit of shorting hoping that you are not going to be blown out. And sometimes, you do on a few stocks, but that is the way it is. So, it is more inclusive already. I do not think that it is narrow. It is not at all narrow right now other than maybe technology. Really everything has done okay.
Q: So, do you see a market which is moving along with earnings or price-earnings ratio (P/E) expansion happening even from here?
A: No, right now it is not moving with earnings because there have been no earnings. But you are broadening the market because people are thinking that those sectors which were not doing well also will have earnings now and driven primarily first by the price of the commodity, secondly by the duty protection and third is this global new phrase, reflation trade which is basically commodity price going up and things like that.
So some part is on a reasonable projection that if you take today's price of commodities, already up 'x' percent more than last year, so why will you not get a full year of earnings rather than let us say, you got half year with the previous price, with this price but in the previous year.
Q: What is the biggest risk according to you to this market which can derail this trend? I am not talking about a 5 percent correction, something which makes you change your mind?
A: I am a follower in these things which means that we have always got long and short. If the market falls 5 percent and we are given some reason which we can connect to it, then we say possible. We will add to the shorts. We are not going to overly analyse like eight anymore because we just say it does not matter.
If it turns out to be wrong, we will be whipsawed for a few days, but I am not shorting the index on which I have very less conviction because suppose I am bullish otherwise and then something happens in the world like a flash crash in the US. Sometimes, you think it is a serious problem and sometimes you think who cares?
If I short the index, I do not know why I am shorting the index. But if I am short these stocks, 15 of them, which I was short on a perfectly good day, for me to add 1 percent to each of them how much time does it take, zero time. So I add 15 percent, my net suddenly falls to 45. I have done my job. So, that is how we do not overly analyse or try to bid because you never know that something may be bad what is happening tomorrow or not at all. First of all, right now, I cannot imagine too much of that.
Q: Is your category getting money finally because 3-4 years the emerging market funds, India-specific funds were not getting any cash. Have we come around to the point where you are seeing some interest?
A: Actually that little bit we are all getting. The reason why you see, because you do not interview index fund managers so the category has got converted to index funds. The only good thing for people like us is mutual funds get compared to index funds. We at least do not get compared to index funds because our guys used to active management, we get compared to mutual funds and we are a little better than them, so yes, little bit we are getting.
Q: Who is getting the bulk of the money?
A: In exchange traded funds (ETF).
Q: All of it again?
A: Yes, because it is such a trend and it is so sad because if you look at the performance of the Indian mutual fund managers, ignore me, look at the Indian mutual fund guys, the big guys, they all beat the market or over time have beaten by 5-6 percent per annum for 10 years. Actually some of them for 20 years, I did it for 20 years. But ETF saves you 10 basis points, one basis point, a waste of time.
I have research to show which is available on Google by just typing it that ETF guys do much worse than mutual funds, why? Because the ETF buyer thinks he is a trader. When he buys an ETF, he thinks I am going for the ride. So, for those two months, his management fee might be lower, but he walks in and out at the wrong time whereas the mutual fund guy has a little bit more commitment to his investment.
So, at the end of the day, actual data of some 'x' number of thousands of people are shown that people who invest in index funds have lower returns than mutual fund only because they are trying to time their entry into an index.
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