The outcome of the state elections in 2017 may not be material for the nation’s stock market but a victory for the Bharatiya Janata Party (BJP) in Uttar Pradesh will be another “bullet point” in the list of positive factors for India, said Samir Arora, fund manager at Helios Capital. Arora was speaking on BloombergQuint’s weekly special, Thank God It’s Friday.
According to him, the impact of the other key trigger for Indian equities - namely the government’s cash ban - was less disruptive than was previously estimated. In fact the consumption numbers started to improve as early as December, and the trend continued into January, he added
Here are edited excerpts of the conversation.
U.S. markets are at lifetime highs. They are pricing in tax cuts, huge infrastructure spends; there’s expectation of less regulation. But there’s also scepticism about Trump coming through with a lot of promises that he’s made. And there’s also the matter of rising interest rates and to an extent, stretched valuations. Should there be a correction in the U.S. markets, how insulated is India?
I think the market is quite well-placed. There are many parts of the U.S. economy which will benefit from higher interest rates. I think it’s a long time since anybody looked at U.S. banks from a price-to-equity basis. They are trading at 0.5-0.8 times book. There are things Trump may or may not do but there are many areas of the U.S. that will benefit from high interest rates. Remember, that in the period between 2005 to 2007, there were 16 consecutive interest rate hikes in the U.S. and the markets were still up. So I wouldn’t be overtly nervous on the U.S. markets. I am quite bullish on the market. But independent of that, the Indian market is part of an emerging market pack. It may outperform or underperform that pack but normally, it would not go in an opposite direction to what is happening in the rest of the emerging market world. So if the U.S. market does badly, for some time everybody will do badly but there is no need to fear that in the current scenario.
Foreign Flows In 2017
If the U.S. economy is in a stronger state right now and that means a stronger dollar but that also means that fund flows into India will suffer. There is an expectation that flows taper as we go ahead this year. Are you of that opinion?
You are already getting tepid flows as far as the stock market is concerned. But I don’t believe that money is a matter of either/or kind of thing. If the world market is up, if the U.S. is up, its normally very difficult to imagine that we (India) will be down. It is possible that in the the emerging market pack, we are up a little less. Secondly, a lot of money comes from reallocation from fixed income and other places. So there will be many people who will lose if they had long-term bonds and they will move to equity. But in general, I don’t think that that for us – imagine what size we get – last year I think we got $4-5 billion and one IPO in the U.S. is more than that. So to get an extra $5-10 millions extra, in an environment where the domestic mutual funds are not passive or sellers means that even $5-7 billion can make a difference to the market per se just because the natural sellers of past, that is, the domestic institutions are themselves buyers.
What Can Stall Domestic Flows?
Have foreign institutional investors become less relevant in moving Indian markets now? Do you believe domestic liquidity is here to stay and what could be an impediment to domestic flows?
In the big picture sense, this trend has just started. We get $10 billion or less normally per year from domestic institutions and maybe they invest some part of their own, and the savings of India must be like 30 percent so that is like $500-600 million of savings which in the past half was gold and real estate and the rest were financial assets. So to think that this $10 billion is too much and it cannot go to $15 billion or $20 billion particularly when the other two asset classes have become unattractive for various reasons. So that flow can continue. The flow can be stopped or reversed if there is a massive correction, frauds etc. But there are many stories that you hear about people who are investing for the first time in equity markets because the money that they had is all in the banks and we have these bankers who try and push mutual funds and insurance products and find a captive audience because the money has already reached the bank. And it’s easy to convince the public these days that that gold or real estate is not a good investment. On a top-down basis, it is not a large proportion, on a bottom-up basis there is impetus because there is so much money in the financial system.
Demonetisation Impact
Demonetisation has probably not fully payed out yet, GST implementation will come with its teething problems. Those will have a bearing on corporate earnings growth which has been elusive for Indian markets. Every year, there is some one-off and analysts say double-digit growth is going to come next year. As the same time, Idian benchmark indices are trading at 20 times forward earnings, one of the more expensive markets globally. What is the missing piece here? Why the mismatch?
First, you have to give credit to all of us who always say ‘next year’. We are always saying next year or second half of the financial year will be a great year. The thing is, initially I was very negative on demonetisation because I thought that the positives of demonetisation will take longer whereas the negatives were here and now which was basically stalling of consumption. In hindsight, the numbers in October were good, it now appears that the growth impetus was so strong that the numbers in December were massively better than November and in January they continued to do better. Up to or in October, the real recovery had started. And therefore, for now the assumption is that it has stalled it by a few months but not permanently damaged it. But the benefit of demonetisation, which is financialisation of our markets, we thought that over time, over 6-12 months, people would find that they have less attractive choices in other areas. We did not realise that they would start more or less simultaneously. In November itself, the flows were very strong and that has buffered the market and effectively helped discount these things faster. Because new money coming takes the view that this is good company in a bad cycle or a good company in a bad quarter. And we cannot argue with that.
The reason why our earnings look lower and our price to earnings ratios look higher is because 30-40 percent of our economy is not producing earnings. These were metal, PSU, commodity and real estate companies. And therefore, wherever there is growth, people are buying and wherever there is no growth, people are buying on the basis that there will be growth. You cannot over argue with that and it is not overly out of line. If you look at it from the last four or five years, other than 2014, I do not think the gains are substantial. It has not been a wild rally except in midcap stocks.
Assembly Elections Trigger
I came across an interesting tweet from you: “Instead of watching exit polls, we should exit from watching these polls.” I probably suggest you don’t think this is a very big event from the market perspective.
From a market point of view, I don’t think it’s a material thing but it will be one more bullet point. If BJP wins as is expected now at least, it will be one more bullet point to not have a negative or somebody question our general optimism. But if suppose BJP loses in UP, after two days, I think we will forget. Because the ultimate meaning of this election is, does it draw any conclusions about 2019? And I don’t think we can draw those conclusions. I don’t think there is some legislative action that is waiting which can only be completed once BJP wins. You tell me which event is waiting for BJP’s victory in these polls. It is more a signal and a comfort that the strategy is generally working. Mr. Modi has the pulse of the nation, but beyond that there is no real stock market value. But now that they are supposed to be winning, that is supposed to one more bullet point in our favour.
Also Read: State Elections 2017: Ready Reckoner
Buying Opportunites
But what are the undiscovered areas in the stock market that may still offer good potential right now?
You don’t have to make money out of undiscovered ideas. My personal biggest holding is Google. And you think I know anything about Google other than what everybody else knows? Maybe even less. The point is, you have to believe a few things. 1) Do you believe that in India people are underweight, overall? 2) Do you believe that compared to the world our financialisation is very low? 3) Do you believe that our state-owned banks and state-owned institutions are not able to compete with the private sector and any area unless it’s a natural monopoly such as a defence company? 4) Do we believe that the private sector financial institutions, private sector banks which have grown at this pace and various cycles can continue to do this and gain market share from state-owned institutions either because of their service or technology or the fact that people now want to do internet banking? And then, whether India itself is not growing at a very high rate; its nominal growth rate remain 10-11 percent and is as low as it gets. And do we believe that the financial sector grows at 1.5 times GDP?
I own Disney. Do you believe that I did some research on Disney? I broadly know that Disney has been around for some many years. If you look on Bloomberg, you will find that from 1989 its stock market returns are at 13-14 percent per annum, which is a very high return for any market; won’t be much better than Warren Buffet has given for this period. You don’t know more; you must believe that so that when it does not do well, you are not shaken out. The game is not so much as to buy something new, but to have sufficient confidence in it from various angles. To not sell in it a bad way. I think that is the only confidence that is required.
‘D-Mart A Long-Term Play’
Some may argue that the IPOs have you seen throughout this year and perhaps the year before that are not all reasonably priced. And yet there is heavy oversubscription in all these IPOs which means there will be little or no allocation to retail guys. Based on that, what premium should you be ready to pay when the listing happens, for something like D-Mart which has seen phenomenal subscription.
For D-Mart, I will be willing to pay because I am not applying to the IPO because it’s going to be oversubscribed 200 times. So how much would I apply to get 200th of that. But I will be willing to pay to this price, at 30-40 percent premium. And that is because it happens to be a unique asset and delivery and execution has been very good. More than that, you can imagine that the opportunities set is very large and that it is not easily disruptive. Some other IPOs come and you buy and you feel it’s more like a film but this one looks like a longer-term play. But because it is going to be so wholly oversubscribed, people will broadly not make any money in the process. And, you will get very little. But a 30 or 40 percent premium will be a steal that day.
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