Year 2018 will be much tougher for the market than 2017: Samir Arora

If you betting on smallcap stocks on the assumption that if markets will go up and these stocks will rally 1-1.5 times – I am not sure of the whole thing, purely looking at the statistics, he said.

We have 2-3 months every year where correction is 6-8 percent in a month. This happened in the year 2016 three times, and twice in the year 2015. It didn’t happen in the year 2017 so it must be coming.

Arora said that he is not bearish on the market, he is just cautious. We know that markets discount earnings, so either market compensates for past or adjusts for future.

Broadly, earnings & markets converge over a 5-6 year period. Otherwise, you can’t justify last year return, or 60% rise in 2009 – those are either adjustment for the past or discounting for the future.

Commenting on the pharma sector, Arora said that we will not buy pharma as a top-down view. See, if you buy an underperformer then you are betting that the market will go up and therefore it will catch up and go beyond.

Below is the verbatim transcript of the interview.

Anuj: Did you manage to invest in some cryptocurrencies like bitcoins last year?

A: I am totally against it. if you see my tweets, I tweeted about this two years ago but that time it was different in terms of small punt could have been taken but I think it is completely off because you haven’t even decided which is your final currency. Look at it that a few months ago, bitcoin was the heir to gold and today now they say a ripple. But more than that look at a scenario where you feel that all these guys who believe in bitcoin are right therefore everything is done online as in the currency is online, there is no government and then the only negative scenario would be that either there is a worldwide hacking or a cyber-attack or an attack on a power plant, therefore there is no power and your only hedge would be gold, the thing which you are trying to replace. The only hedge to this would be a physical thing and you are trying to replace that with no hedge. So I think this is not going to work, by the way, year to date, bitcoin is already down 6 percent.

Latha: I read that point where you had said that why should bitcoin alone be the heir to gold.

A: There are 1,600 or some such currencies already out there. A private company says, I have decided to issue so many billion coins, who are you and then the value what they hold currently, although they cannot sell it, is more than USD 100 billion. There has to be some sense but not to worry, we have seen many things in the past, we ourselves had participated in many in small amounts. If anybody thinks, this is the new avenue for speculation; they are most. I do not think it is beyond that.

Sonia: You also talk about how nearly every Indian stock has given higher returns than bitcoins, in one of the weeks that you tweeted, but I wanted to ask you your view on the markets as a whole in 2018. Do you think it could be as good a year as 2017 if not better?

A: That was a mean tweet because it was only for that week when the bitcoin had corrected by 20 percent.

I think 2018 will be much tougher than 2017. If you look at 2017, look at the different markets; look at US, S&P, look at even euro, look at yen, forget about the Japanese market. Look at any market in dollar terms, any investment in dollar terms including currency; including gold, oil, everything would be up between 15 percent and 30-40 percent and midcaps and India maybe 45 percent and smallcap maybe 60 percent. So obviously this is a bit too much. We do not mind it and we are going along for the ride. The only difference between now and my previous times is that I no longer believe it so much that if it corrects I fight it which is what I have done in the past particularly in the first two months of 2008 and little bit in 1999-2000.

Now I am not that big a believer that if somebody is redeeming. We will say we will redeem from our cash but we won't sell for him because he is foolish in redeeming from our fund, let's say or that I would not lead it myself after a few days. So that is the difference. But otherwise we are going along because every asset, every category wants to go along. Who am I to pre-empt it. But do not believe that this is justified beyond a point. I do not think it is that justified too but we do not fight.

Anuj: A lot of midcap pharmaceutical stocks have given a decent return over the last quarter of last year. Do you think the risk reward is favourable here?

A: I do not know about midcaps. We own only one pharma stock but in general we would not buy it as a top down view. Like we buy private sector banks as top down view and then we choose which stock to buy but we can say in top down we like this theme or we can say in general sense we like consumption. Things which you first start from a top down and then you find which one would look okay to you for whatever reason. In this one you cannot say from a top down I like pharma. There is no logic for that or you can say this stock did not have this problem or it passed Food and Drug Administration (FDA) test or its one drug is good or bad but you can't say as a top down that pharma is good because it corrected last year because my worry is that before that correction gets reversed, the market may correct then what will you do.

Right now you are betting on two kinds of things. If you buy an underperformer, you are betting that the market will go up and therefore this will catch-up and go beyond or you are buying the smallcap stocks on the basis that the market is going up and therefore these will continue to go at 1.5-2 times.

I am not 100 percent sure of the whole thing by looking purely at statistics. The statistics are that we have two or three months every year where the correction is more than 6-8 percent in a month. This happened three times in 20016; in January, February and November. In 2015 it happened two times. In 2014, which is supposed to be such a good year in the last month, it fell some 7-8 percent, in December of 2014. In 2011 and 2013 it happened so many times. This year it did not happened, that is 2017. It must be coming without any reason, without any great logic and then we do not want that at least in the beginning of the year. Beginning of the year is a treacherous time which we want to pass smoothly.

Latha: You will have to admit that there is growth. You pointed out to all the indices. Likewise if you look at economies as well -Europe is better-off, US is better-off. India, hopefully, should be better-off this year. We should have wiped-out our goods and services tax (GST) blues and sheer base should make us look better. So the rise in valuations at least has growth to speak for itself. Do you think that is secured? Therefore, we shouldn't have a bad year?

A: We are not bearish. The only thing is we have become more flexible mentally to defend anything. We are not bearish for any reason. Why should we when the world is doing well. We are having some events and some flows of domestic funds and that maybe one reason why that may change our volatility, historical patterns or whatever but generally speaking all I am saying is we are not at some cutting edge. We are followers today and January 1st is bad from another angle; for funds or for us or for everybody which is that - last year we all beat the market by 10-15-20 percent depending on which fund and today we are at zero and zero. So we are starting again with index zero market flow and fund zero.

You have to see how it goes but generally there have been very bad Januaries in the past and I do not want my first month to be bad, whether in absolute or relative to a market. My net is still very high - 68-69 percent.

All I am saying is - in my mind I just want. I cannot say today to myself and therefore truthfully to everybody that this year we will have earnings growth and therefore the market will go up a lot because I believe that markets discount earnings but not simultaneously. They either compensate for the past or they adjust or discount for the future or sometimes they will go along with that year's earnings but broadly earnings and markets convert over five-seven years but not year-on-year every year. Otherwise you cannot justify last year's 40 percent, you cannot justify a fall of 50 percent in the market in 2008 or a 60 percent rise in 2009. Those are all either adjustments for the past or compensation for the past or a discounting of the future but not a simultaneous discounting of what is happening that day. So that is why I am just saying that relax, it has been a super '17. There is no need to get hyper on the first day.

For entire interview, watch accompanying video...