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Invest slowly, nothing is changing in the next three months: Samir Arora

Things have a way of turning around with new sectors or stocks emerging.

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Last Updated: May 22, 2020, 04.33 PM IST
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The fact that our equity markets will underperform the US market for this year is more or less given, says the Founder and fund manager, Helios Capital.

If I look at what is happening in the world versus our markets, we are underperforming. Do you think the underperformance is here to stay and it is real?
Yes it is here to stay and it is real. The fact that our equity markets will underperform the US market for this year is more or less given. It is widely expected and reasonably so. One reason for the market per se is that we do not seem to have clear beneficiaries of this problem unlike the US where you could say Amazon is a beneficiary, Netflix is a beneficiary, Google may be a beneficiary or some pharma companies which are finding Covid-related issues are clear beneficiaries. Even gaming companies or Zoom.

India does not seem to have clear beneficiaries, maybe Bharti Airtel and a little bit Reliance. For the rest, we are only looking at what is less badly affected. We do not have that breadth or companies which are benefitting from this.

What does one do in this kind of market? We are in for the worst contraction in the history of India. How does one go about investing in this market because on one side, you have to fight fundamentals and on the other, you have to fight the Fed. Who will win the final battle?
For an Indian investor there are two things: a) that equity should beat debt and b) believe in the history of markets. Markets are forward looking and they have discounting mechanisms. You need not totally panic at the bottom because things look bleak. Things have a way of turning around or new sectors emerge or new stocks emerge.

In India’s case, suddenly Bharti and Reliance seem to be leading. One year ago, nobody was buying Bharti Airtel. So you will have markets in the end reverting back to history because they are forward looking. Six months later we will say that the economy has turned up from the bottom and that is happening. The GDP which was down 45%, next quarter might be down 5% and after one quarter flat and the markets will look forward.

Therefore the idea is that you can take your time in making new investments, you can choose new stocks, you can choose new sectors. But broadly, the lesson of the last 100 years and across markets is that you do not leave the market per se and try to say that I know something which others do not. But broadly it is true that India has less room for fiscal and the attitude towards the corporate sector in terms of trying to support it aggressively, which is what the US is doing.

Plus, the US has a different mix of companies and also technology companies and gaming companies. These are in-home beneficiaries where you are spending more time although India does not have that. That is why India is underperforming but it will do okay compared to the choices that Indian investors have.

This entire narrative which everyone has is this is the time to go underweight on financials. They are over owned by institutional investors, they have redemptions and they are checking their exposure. Should one seriously look at reducing exposure to financials and especially banks? What about good old HDFC and Kotak Mahindra Banks which have created a lot of wealth for shareholders?
We do not believe so. Let us look at the big picture. When a stock falls by half, for a year or two, there are bad earnings. Nobody is saying that they will make losses as a company they have made. Suppose their earnings growth is zero or minus 10%, for one year nobody is imagining more than that. So you have basically written off 50% of the company as if the company’s life was two years and your one is bad.

Also look at it differently. If a stock is down 50% and another consumer company stock is up 20-25%, that means the consumer company is now worth 125% more because this 100 has become 50 and the other 100 has become say 125. So 125 divided by 50 is the new relative valuation. But we have also not bought new financials because we have always had and in fact we have also reduced in the last month, month and a half, some of our NBFCs and even two smaller private sector banks. But to say at every point that it will underperform because it is over owned or under owned is just an excuse. Afterall, it did not underperform for 20 years while it was always over owned.

But everything has to be done with discipline now because that massive sector run that was there is over. But stocks still do well as we have seen in the last three or four bull markets. In every bull market that I have seen since the 90s that the private sector banks outperformed in all the three bull runs.

JPMorgan has done the same in the US. So the good stocks will do well but there is no need to jump in today. You can take your time for a new investment but to run away and say that now I will buy something which is up 25% because this quarter people bought because they were sitting at home and ate more chocolates or noodles or others, does not make sense.

Coming to the IT sector, I was just looking at some of these names. They are cheap as well but clearly lack the spunk. Do you think the Indian IT sector can really try and grab a share of the digitisation that we are going to see world over post Covid?
They have not shown any such initiative before. Maybe the only thing they can do is help the US companies because Indian companies would not hire them. They can help the US and global companies adapt to work from home and make that secure. When TCS says that we will have X percent of our employees working from home, that will be their model to sell that service or maybe they are already selling it to others. But to have true innovation in terms of creating new products is like saying that India should do this and should do that. We bet on what will happen and not what should happen.

On the chocolates and noodles that you were talking about, we are consuming data and we are consuming food during the lockdown. Consumer companies are trading at 60 PEs. Do you still venture out and buy them fresh?
Well some of them we do not basically because if you are stocking up, then that itself affects the next quarter. Secondly, we have many consumer companies but I am just talking in general about super high ones because the idea is that your scenario for the future will always be like this which means say eight quarters, you will only be buying food at home and eating at home. That will mean the overall economy will be down, the market will be down and these stocks may outperform but are highly unlikely to really make you money even more than the interest rate.

If you are thinking that the economy will settle down in terms of bottoming out and then move up and then by definition other sectors which have been beaten up more and where the delta will be higher will outperform. We have already seen that for this quarter -- in April and May -- they are unlikely to have got any great sales because those in pipeline are gone and new production has not happened and the lockdown has not lifted. So, this quarter is going to be a disaster, then the results will come out and may disappoint many people.

Aviation sector is opening up from 25th May and the middle seat will not be left vacant. Multiplexes have been beaten black and blue. But some of the QSR companies have reported decent numbers and they have got very positive management commentary in the quarter gone by. Where will pent up demand be unleashed and vengeance buying make a comeback?
Pent up demand will be only for the first one or two or three weeks depending on each sector but the overall demand has to be down because of A) loss of jobs; B) Cutting of salaries; C) Closing down of many small businesses, restaurants and all who are not selling you products but themselves are consumers.

The pent up demand will mislead all of us because in the first two weeks or one week you may find all of us wanting to go out to see what is happening and then may be because of some second wave or even otherwise because the nervousness is not over, it will retreat. Pent up demand should not be viewed as a predictable future.

So I would not bet on the first three days of people going to a movie hall or first twenty days of people taking flights because they may be stuck up in one city and they will want to return home and whatever the ticket price is even if it was not capped. But that does not show any consistency in demand coming back.

The Chinese and Koreans are claiming that car sales have normalised; luxury car sales are back. Disney Land opened and was soon sold out. But you will not read too much into that?
First of all please note that in China, one city called Wuhan was locked down and the rest of the country was not locked down. They have not lost as many jobs and as many businesses because it was not a large scale lockdown. The fact is in reality, we have had so many job losses and how can those jobs come back? In any case, over the last one or two years, more Indians were earning less in terms of incremental income and spending more which means they were reducing their savings to consume.

In the United States, among the people who have lost their jobs, more than 50% are earning more than what they were earning before as they get good unemployment money. This article in the Wall Street Journal about two weeks ago said 50% of the people who were fired or furloughed, are earning more than what they were earning when they were in a job. In theory, they are saving money right now because they are earning higher or equal to what they were earning and they are not spending as much. So clearly, when the malls open, if they do not feel otherwise unsafe, people will buy and spend money.

In India, there is no such buffer. I am not negative on India. My fund runs on India and I sell India. But the point I am making is that to conclude that we are underperforming for a reason, let us not draw any conclusion. Just because Amazon results were good, the Nasdaq goes upland therefore, next day we have to go up because overnight the US was up, they are different stories.

On the way up, we have underperformed the world. On the way down, are we likely to outperform? I understand the Apples and the Amazons of the world are taking those markets higher but the US economy is also going to contract.
I am not seeing the market going down. I am saying it is not easily going up. If the US market goes up, we will go up a little less but we will mostly go up more than what the investors can earn in their debt and other investments. I am not saying that we have to go down more than the US is going down. I am just saying that this idea that this pent up demand will help consumer stocks may not be the case.

But does it mean I have more consumer stocks? I have 20% in consumer who broadly buy the stocks that you like and they do not overly believe in the story this quarter and the next. But I do not believe in buying stocks which are up 25%-30% in an environment where the market is down 25-30% on the logic that in this quarter somebody bought my consumer item.

I am not betting that the markets have to fall a lot and whether we will outperform or underperform. I have no basis for that in that sense things are improving and hopefully there will be some cure, some vaccine and then people will even look one year forward. But just because somebody had a good March quarter, does not mean a thing to me.

Some of the veteran investors have been bearish. Is it because the industry is unhappy with the package that was announced? Is it a belief that the government genuinely does not have the ammunition or are they just being apprehensive about the fisc and future borrowings and are not actually putting down those financial packages that clear financial stimulus on the table -- be it bailouts or cash infusions. Recapitalisation is going to be the need of the hour.
I do not know which veterans you are talking about. But in general I would say that it is also a philosophical issue. Somehow this government feels that the corporate sector, the business sector, the investors are people taking advantage of the country or other citizens or whatever. There is not that feeling that we are here to protect businesses, that if we are talking to business it is not some shady thing that we are talking because businesses are an important part of the economy.

I am not a businessman but I do not feel that the government or the system at large thinks that these businesses need to be supported that actively as it happens in the US.

Certain pockets like real estate were already reeling before the lockdown There is no silver lining for them. We are heading into the monsoons. Even in pockets like infra, construction that are seeing a resumption of some amount of activity, things will pause again. All this is going to delay the impact of what we are seeing -- be it on the economy and in turn the stock prices?
I agree and therefore we basically invest only in three sectors which are financials, consumer and tech pharma. Once in a while, we have bought telecom stocks but in general the idea is that you should not be relying on government revenue, government policies beyond a point. Although today everybody is looking for a government policy or a bailout.

That is why I say this is a philosophical thing. Somebody can say oh! you always like private sector companies but now that the private banks are in trouble, or you want the government to not directly help them but help the borrower, help the MSMEs who can then pay off the private sector banks? These are all philosophical issue because in the United States all the companies are private and therefore everybody by definition does not have to care whether they are buying private or public. In bad times, the government knows that it must help and in return in good time they will get it back via taxes and employment.

But here on a bad day suddenly the public gets up and say aha Mr Arora, everyday you only wanted to buy HDFC Bank and Kotak Bank and now you want the government to help these private banks? Maybe they should only help the state-owned banks? It is a philosophical thing and that is why the Indian market would look less attractive than the US market to a totally macro guy because on a bad day in the US they will come out and try to help.

Coming to the real estate sector, there are so many issues right now. If work from home works, then that means the employees do not have to be living in a big city. Instead of Mumbai, he can stay in his home city and buy a bigger house in a smaller city. Therefore many things will change and nobody has any idea. You will still need financing, you will still consume a little bit and export but beyond that, there will be massive changes.

We are doing the best we can based on good quality companies and history and valuation. Mostly it will do better than your other alternatives but please do not tell that to put everything today because it is the best time and whatever happens, India will outperform or that equities are the best. You have to view it with a little bit of humility.

What could really lead to downside? Will it be selling, will it be more and more bad news coming on the economy front? We will have no corporate earnings this year, credit is going to be in problem, banks are not lending, corporates are not doing well, MNCs are in trouble. Is not that consensus and general knowledge now?
No, it is not. Earnings growth for this year is still quite high but the problem could be not knowing how far this will continue and what if there is a second wave. Plus, there could be disappointments with vaccine trials. Then we do not know how many people are really paying their rent to the malls, to the real estate companies, how many of the small companies are going under. If these issues are solved slowly, you can increase your equity allocation a little bit or average more.

We all keep saying that market timing should not be done. You have to be a bit comfortable to invest. I am saying just relax. Whatever is invested, juggle it around if you want or change the stocks because stocks need not outlast you but the market will outlast you. Invest slowly, nothing is changing much in the next one, two, three months so that you would be missing a massive rally or something.

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