A pair of 2019 glasses sit on the desk of a trader working on the floor of the New York Stock Exchange in New York, U.S. (Photographer: Michael Nagle/Bloomberg)

U.S. Markets Must Stabilise For India To Do Well, Says Samir Arora

India and other emerging market peers will perform better this year only if the U.S. market stabilises, according to Samir Arora, fund manager at Helios Capital.

“There could be volatility in short-term if the U.S. witnesses violent move,” Arora told BloombergQuint in an interaction. “The Indian markets will outperform even if the U.S. markets fall 5-10 percent. But there will be no positive returns.”

This comes at a time the U.S. markets traded volatile last week. The S&P 500 Index moved more than 1 percent in 11 trading sessions since December.

Arora was also bullish on the private sector financials. “The private sector has been our number one theme over the last 15-18 years,” he said, adding that the company has taken fresh bets on two corporate banks. “Banks have been taking huge bets and have failed. In the recent times, however, they have come down and that would improve their asset quality.”

But the market veteran reduced the share of non-bank lenders in his portfolio to 6-7 percent from 15 percent after the liquidity crisis triggered by payment defaults at IL&FS and its subsidiaries threatened a contagion in financial markets.

“We are not sure how markets will react to the NBFC sector. We expect that the sector will take some time for readjustment,” Arora said.

Watch the full conversation here:

Here are the edited excerpts from the interview:

Will 2019 indeed be a happy new year, or will it be volatile like 2018?

2018 in between was bad but at the end of the year it was not as bad. So, all is well what ends well. For rupee investors, it was not a bad year. Considering what we went through in September, we are still grateful. 2019 should be okay. We need the U.S. markets to stabilise. India and other emerging markets may do well this year but no runaway rally is expected till this election is done. So, it is a good time to not feel overly hyper negative, but it is not running away soon for sure because of the event that we must negotiate.

Do you reckon that the U.S. market can stabilise?

Last year, the growth was too high because of the cuts on interest and tax rates. So, it can stabilise with the Federal Reserve saying that the interest rate cut is either back-ended or instead of two it is one. They still have that flexibility. Also, Donald Trump would have realised that China is keen on the negotiation but also for the U.S. market and companies. So, they can all mellow a little bit by changing their conversation. These things are still within their control unless they want to go head-to-head beyond a limit. They must still negotiate many things but must not take a very hard stand on some of these issues. Ultimately, Donald Trump has publicly admitted that the stock market is a reflection of what is happening in his presidency. It doesn’t mean that you are reversing everything. Right now, the Indian market does not need the U.S. market to do very well, it just needs to not fall every day. In that environment, we can outperform but we can’t go up. We want it to stabilise, which can happen.

Do you think we need to worry too much even if the U.S. course corrects from here?

We get money from the U.S. and the U.S. doesn’t give us money. We are two percent of the world and they are 40 percent of the world in terms of stock market weightages. We don’t have the same situation with them like when we were falling, they were not falling and so the other way around can happen. If that market was doing badly, I don’t think people would be desperate to say that they wish to put money outside.

The U.S. currency strengthens, rather than weakens, when they have a problem. The funniest was in 2011 when the U.S. ‘AAA’ rating was downgraded by S&P and we though that rupee will strengthen. But, the rupee weakened by 20 percent in three months because people thought they were going back to safe havens. You don’t want them to be in a bad shape but just want them to do less well than us and to not dramatically outperform their own other asset classes so that money doesn’t get to the U.S. We can’t wish that if the U.S. does badly, then people will leave the U.S. and come to rest of world. It doesn’t happen that way.

However, the situation is as worrisome as it looks at this point.

I don’t think it is. For whatever reason, if their stock market falls, we can outperform but cannot expect to have positive returns. So, the best would be that the U.S. stabilises and may be corrects itself, but not in a violent kind of move. If it is a violent move, then the positive for the short term can be that the high volatility will make the federal reserve a little bit defensive about raising rates. It might temper down the aggression of Donald Trump vis-à-vis China. That is how I am interpreting it today.

Does the cash transfer to the rural sector worry you on the fiscal side in a way that it will change your bullish market view, assuming you have a bullish market view on India?

I am bullish about the market, but I don’t think this (cash transfer) will change it. Time is running out and even in terms of the government currently doing it, they can only make announcements. They can’t do much. Let’s say they say that they promise to pay a certain amount to farmers if they own an acre of land. I am not sure who has this one acre of land and whether it should be given to head of the family or two brothers if they own it together. These things will take time. They can make announcements and send little money.

Also, will they consolidate other schemes when they propose the scheme? Or will this be totally additional? I think it all depends on how much they do it in terms of the phasing, and the positive impact of it on rural consumption. The bigger picture is that the urban India must, in some form or other, transfer a bit of wealth to rural India because we are not creating jobs for them to be taken on the farm. There is no urbanisation where they can move. Something must be done to keep the whole system running together.

In the auto pack, the numbers are looking lower than what the street was expecting. How would you play this now?

We are net negative because we are short on so many stocks. We still have Maruti and mostly we are short (on) everything else. It is a reflection of the fact that there was a weak festive season, inventories were high, NBFCs (non-bank lenders) created issues, oil prices in September-October were high. It reflects that it was not a good season. If the rural economy improves, and in general if things improves, it will be alright. I don’t think it is a hot sector or worthy of too much attention in a portfolio beyond five-seven percent. Nobody will have 15 percent in auto anyway. But in auto ancillaries or other, you can have higher weightage. It is one of the smaller sectors, but it is reflection that the consumer has not been very strong.

Where is the large concentration, if not autos, and how do the dynamics change?

The best thing in India is that we have a very good financial sector. In private-sector banks in the past twenty years, only one of the stocks is up 1,000 times but still these are the best because they take you where the growth is. That is the best thing about these two-three stocks. If there is growth in auto, they will finance auto; if there is growth in mortgage, they will come there directly, or if there is personal consumption or if it changes to corporate growth, it will take you there also. We always like private-sector financials as a number one theme. And it has been with us for 15-18 years.

Has your view on financials changed post the IL&FS crisis?

In the private-sector banks, it has changed in the last five-six months as we also own two corporate banks. Some of this is not because anybody has changed, or management has changed, but it is just time. You create NPAs (non-performing assets) when you lend to corporates’ long gestation projects and those projects aren’t there so your ability to have big bets and then fail come down. And time teaches everybody. So, that has changed our exposure to private sector banks. We didn’t reduce but added new names.

On NBFCs, we have one or two shorts which were not around for four-five years. We used to have 13-14 percent in NBFCs till August. Now, with shorts we might have six percent. So, it has changed. Even though all these companies in the end will survive with dignity, the issue is that we don’t know how the market will now react to the fact that you have survived. But your earnings, growth, model going forward has changed. So, we don’t know at what levels it will be new round of NBFC growth, but they will all survive, and they will do well. But this re-adjustment will take time.

Have you changed or taken fresh bets post IL&FS?

We have taken new bets and we were already in this sector. We were at 13 net or gross as we never short and now, we are six to seven because we have reduced one name from the long side and we have added two names to the short side. Our exposure is less, and it is controlled. We have to see how it goes and then take off the shorts. But that depends on how the market will interpret the fact that earnings growth which was supposed to be 20-odd percent will be 10 or negative for this quarter and how will market react to it even though they may say that worst is over. We also don’t know whether to think that in March or June quarter it will be okay. Also, the model itself, in terms or leverage, asset liability mismatch, they have changed the rates. NBFCs like Bajaj Finance which is not affected. So, on that we are not overly hyper on long side but for other ones we have mellowed.

Does it make sense to be more defensive in the portfolio around this election time or will you not take this route?

Some people can do that by just putting less amount of money but to buy a different stock for two-three months, we don’t quite like the idea. We can have 5-10 percent short which we can change if the world wants to preempt the election right away. But we won’t change the stock selection for two-three months proclaiming that after April we will do something else. If the company is otherwise good but is held by the fact that market is not going up, then that is easier to analyse and imagine buying than buying one stock and moving to another. We don’t become defensive that way. it is easier to react to these events. For a normal investor, we can say if you don’t want to put Rs 100 then put Rs 80 without changing the mix.

Is it worth having defences in the portfolio, apart from volatility?

We don’t know what is defensive. You can say that a consumer (stock) is highly valued and cheapest is an NBFC today because they have gone through pain and survived. We never do that . Our bottom line is that there are certain strong secular themes in India and it is easier to stay with them. Those in the big picture are financials and consumer. Once in a while, if something is happening to currency and tech, you will find the best, strong and most secular long-term themes are consumer and financials and consumer as broadly defined which means two-wheelers and four-wheelers but not trucks. Even consumer durable and media. Broadly defined, these are the two themes and we will never change them irrespective of what happens to the government. You could be on short side, like metal, NBFC, telecom. But those are temporary than the long side.