This is The Start of The Earnings Pick-up, Says Samir Arora

As a hedge fund manager, I can be bullish and bearish on different stocks. But in general, in an environment where the earnings cycle is just going to start, where we have a good monsoon, where we have good macro developments, where interest rates all over the world are very low to negative, it is not clear that an 18 times PE should scare anybody. The last two years have been very bad for different reasons – commodity prices were lower – which affects corporates – or bad monsoons, or stuck projects, and a host of other things. So I think everything is quite bullish right now, in some sense.

With interest rates so low, people have to think differently about what they expect from stocks because people, at least in the U.S., have been buying stocks on dividend yield because the 10-year interest rate is lower than the dividend yield of that market. This is a rare phenomenon in the past 10 to 50 years. This also means that pension funds, and anybody who has fixed liabilities, and has to make estimated returns on their assets, can’t project a very high number, in terms of a return from their fixed income investments. They have to go to riskier assets, and will therefore, have a marginal propensity to invest in markets. And the 8 to 10 percent returns they are hoping for can only be achieved in emerging market equities. The pressure on them to invest in riskier assets will be high for quite some time.

If I look at the macro and the whole market, I think it will be easy to achieve earnings growth this year because of the base effect. If you look at state-owned banks or commodity companies or any rural-oriented companies in the last 1 or 2 years their earnings have been negative. If you look at extreme outliers, you will have corporate earnings growth that would look quite high. But if you exclude the extreme outliers, the rest of the market will still grow 10 to 15 percent, and that is adequate in the context of where the world is right now.

We have held them forever, though we trimmed our holdings a little bit.

We are less invested in these sectors as our financial sector weightage is so high. About 5 percent of our portfolio is in each of these two sectors.

Right now I don’t have any preferences for the next RBI governor and that is because the market does not seem to overly care about who the next governor is, and so I do not care.

As I said, actually they’ve done a lot. Some of it has not yielded results in terms of observable changes because the biggest sector that was a problem was private sector, companies which had borrowed heavily, which were in overseas projects in steel and other capital intensive sectors. Those groups have not seen change although now they’re seeing a little bit and that is why the question was that reforms are not translating into corporate health. I think that has started - because of time, because prices of commodities are no longer falling every day, and thirdly because other factors like the monsoon are okay.

On the fundamentals versus liquidity debate, there is no answer. If the world has put money into India because they have too much liquidity. Why did they put it in India and not somewhere else? It’s because India has slightly better fundamentals. Some other countries’ stocks may have done better this year like Brazil and Russia but that is because they fell a lot last year. So that’s a totally unfair comparison.

Our logic has been for the last 7-8 years that we cannot preempt many global events because they may play out differently from what we had imagined. So we will play on the India basis, and we like India right now. If for whatever reason, like it happened after Brexit, when we thought it would be a big negative but it wasn’t...if the world becomes negative for beyond 5-10 days and we really think that the story that is being created around that event at that time is justified and logical, we will go with the flow, as in we will also sell. We have realised that some of these things are...you could, if you are really bearish, call it a house of cards...that interest rates are low, it is unsustainably low, it cannot be like this. On the other hand, these things can go on for three years and five years and you can have the same argument that the central banks are inflating...So the best thing is not to overly anticipate, do what you are doing, and then on the margin react to global events. So we don’t know but we will react if the world wants to react.

The government is really anti-gold and also believe very strongly that in the GST Bill, gold jewellery would be listed to bring highest possible revenue. Arvind Subramanian, in his GST write-up, said that if you can make GST on jewellery 6 percent, you can reduce the revenue neutral rate by some 80-90 basis points, just on that basis alone.

I read a lot of books and I read books on everybody, on hedge fund guys, mutual fund guys etc. If somebody asks me who is my investment guru I would say investment books rather than any one person.