Mkts rally to start with large caps: Helios Cap
Published on Sunday, September 21st, 2008 at 6:32 AMAuthor: admin (5507 Articles)
This has been an extraordinary week. The sequence of events in global markets has left everybody stunned, it started at one level and then the cards just kept collapsing. Markets hit the lows for 2008 and retested it. Whether it’s a double bottom for the moment is not known. Markets did go and retest July lows and there was some good news because of concerted regulatory action across the world by the end of the week.
So have the markets put some kind of a bottom in place for the near-term in the midst of all this panic or is the door still open for lower levels during the course of the year? Are we still in a fairly vicious bear market?
Samir Arora of Helios Capital said that markets may be near the bottom but it is too early to take a call on trend. According to him, financial sector problems are not over and the sector needs to stabilise first. He sees no serious upside in current environment. He is reluctant to put in fresh money because overall positions are quite low.
Arora feels that the interest level has reduced and any market rally will start with the large caps. He advices not to look at price to book numbers as most global banks do not have a book.
Arora said that Lehman news was expected but AIG was a surprise for investors.
Arora said that redemptions are happening but there is no correlation with rupee weakness. “BRIC funds are under pressure as all countries have done badly. BRIC funds are shaken, he feels. But he is not sure where they can redeem their positions.”
On his market strategy, Arora is likely to be more bullish after the new government comes into power next year.
Here is a verbatim transcript of the exclusive interview with Samir Arora on CNBC TV18. Also watch the accompanying video.
Q: Have we put some kind of a bottom in place or you can’t be sure of that?
A: The last few days have been so vicious in both directions that it may be difficult to say that for the next one or two weeks, as these events unfold. But, news are getting discounted quite fast. Having seen big companies like American International Group (AIG) and others in such trouble, it is difficult to imagine that there will be any bigger shocks that would really shock the system.
Malicious rumours about more or less reasonably healthy companies in the last few days is a bit scary and if that phase can be overcome, then the bottom has been set. But these rumours are something, which you can’t analyze and the main problem is that two days before these rumours start, you don’t even imagine that this would be one more problem. That is why, I am hesitant to say that right now is the near bottom but this month would be a bottom somewhere.
Q: What is your assessment of the global situation?
A: Currently the problems reside in the financial sector and some of them may spillover into other sectors even in real estate, where it all started. I am not sure of our own government but other government’s response has been quite fast and quick and at the end of the day unless the situation goes so out of control, for which the probability is always low but the impact is very high. In a normal situation, you would expect that you have three brokers out of top five in US but it is no longer there. If the theory is that every bear market or vicious bear market should claim a number of victims, nobody has ever said in the past that the bear market should have everybody go out of business.
These visible symbols of capitulation or markets going up and down violently to find a level and the fact that you have to claim some high profile victims has already happened. Therefore in some sense, if the financial sector stabilizes, then you can analyze other companies and other businesses without this overhang.
Q: What about the real economy though in the last few days while everybody’s eyes has been on the blow ups, which have been going on in the financial sector. The feeling is that things are grinding lower globally and maybe in next three, four quarters we have got to content with much lower growth. Is that all in the price or do you think that might cap any serious upsides from here globally?
A: A serious upside does not exist in the global markets right now because these problems, entangling the problems of Lehman, AIG and others, asset sales and stuff like that would go on for a long time. There will be many people in the US losing jobs. The confidence would be low but the stock market in theory can discount before a problem, like in the past six-nine months. As of now, me who is supposed to be a big bull would be quite happy with stable markets not necessarily with markets that go up a lot. The problem has been that we have not even got markets which are stable for month to month basis, as of now that itself would be a big highlight.
Q: Have you toned down your own expectations from the market in the last few weeks, as you said that you are on the more optimistic side but have the events around you led you to temper your expectations for the next few quarters?
A: What is relative to my own past have been tempered down. I may still be more bullish than the average currently. For example, we used to have about 60% net exposure to the market or in the fund to the market in the past. Now, our exposure is about 45-50% but I am not in the camp of having zero net kind of exposure or 10-15% exposure, which many of my peers have at least in the India oriented funds.
So in that sense, I have toned down but that is also basically to try and save capital right now. I remain more bullish than others and more constructive. So on a relative basis, I am still a bigger bull than others.
Q: What is the reality of what the hedge fund universe is doing now? Everybody is running extremely scared and is net short or just reluctant to put any money to work in any emerging market out here.
A: As of now, that is the situation and that is why one could say that there is some hope for more bullishness. The markets act in a way to hurt the maximum number of people and that is the sort of objective of the market in some sense or at least to institutional investors. So right now, the investors or fund managers would get hurt more if the market roars a lot rather than if it fell a lot because the way the world is positioned, they are all are running very low net.
The market has underline support but the problem in the last few weeks has been this macro things for example Lehman Brothers was a well publicized problem but who would have thought last week or the week before that AIG would suddenly now be an overhang. So that kind of thing, which is coming as a googly into the stock market or to the stock participants, is something, which is a bit problematic. Therefore, we have to wait for a few weeks here and there.
Now the world, fund managers, investors would be very happy. We can still raise new money for India. If all we could say that the market would not fall significantly from here and could rise10-15% also in six months. I could raise USD 0.5 billion, even if that kind of assurance could be given and that assurance can be given now not so much by just telling the positives but by the market itself for the next few months behaving with a little bit of dignity.
The problem in India is that since July we did very well as a market in local rupee term relative to nearly every other market and in that sense the pressure on Indian oriented funds went down. But the unfortunate and in a sense overly depreciating Indian rupee without any real comment from anybody in India except to say that we led the markets decide is again a new source of depression for all of us.
Q: Do you think it will remain a problem and is that weighing down quite heavily, the dollar/rupee because it has taken away 15-16% from your returns in last few months?
A: Not 15% in the last few months, the rupee has depreciated about 14-15% year to date and in the last few months about 8-9%. The point is not devaluation although that is one pain; secondly it is complete lack of interest in our country about holding the hands of investors. We look at our investors as if they are some speculators who are only here to make money out of the market.
If you look at how the US response to this is, at the end of the day whenever they settle in a macro sense, not comparing India with US but in the world again, US will be one of the better places to invest because they take their problems head on. They may have created their problems themselves but then they are quite quick in reacting. Whereas for us, we as of till today don’t know whether India wants a strong rupee or a weak rupee. We will let some anonymous speculator of the world decide for us because we say we let the markets decide, we don’t even know that. We want to set expectations of inflation and we say anchor inflation expectation but we don’t want to anchor currency expectation. Six months ago, all the corporates who betted on strong rupee lost money and now in this quarter who would bet other way round would lose money. There is so much volatility in something which is so basic, we don’t even overly show our hand and I am disappointed with that.
But in general, currency don’t depreciate more than 14-15% in a year relative to dollar and it would be a bit unreasonable to think that dollar should continue to strengthen with the kind of problems they are having in their own market. We are blaming India because gold, silver, euro has gone down and so what is so wrong about Indian rupee going down. So, we can create it both way. But on a day to day basis, investors in our market should also get some hand holding of directional help atleast where policy etc. is concerned but we don’t get that. So on a day to day basis, the Indian fund managers are supposed to market India to the world without any support.
Q: Are you expecting some support from the policy makers on the interest rate front because we will have our first monetary policy from the new governor of Reserve Bank of India (RBI) in few weeks time. China has cut rates and people across the world are talking about cutting rates. Do you think that might come through or is it too much to expect?
A: I think too much to expect. Right now we go to our old policy, and buy the companies on the basis that there is no help from anybody. For 10 years from 1995 to 2003, it worked well and then suddenly we got carried away by the fact that India became a positive macro story. Therefore, we overly relied on macro. So, we go back to our old things and if it helps then we would be grateful but beyond that I don’t think the new governor may not try to immediately loosen policy and as long as they don’t tighten it would be a big positive. Even in that nobody really explained why connection was drawn between global commodity prices and local interest rates and how was that expected to bring down inflation. It can be done but there should be some philosophical debate and not something that is kept as some black box.
Q: Is there still a lot of redemption happening for money in this part of the world, we keep hearing of that BRIC funds as a theme has gone out of flavour and therefore are losing money, is there anecdotal evidence that you hear such stuff that people are pulling out of money?
A: Redemptions are happening again. People say that because foreigners are redeeming and therefore currency is depreciating. It could be the other way round as well that foreigners are reducing because the currency is depreciating. There is no formula in economics; in economics they always say you should have one handed economist. We don’t know whether investor are redeeming because they are sick of losing money on this kind of thing or is it the other way round.
In general, you can imagine that BRIC funds are under a lot of trouble because the BRIC money is not very large in the world, in a BRIC oriented funds alone because previously India China did very badly and in the last two months Russia, Brazil have done badly. So, effectively all the four pillars have been blown off.
In our fund, we have about 8-10% money from BRIC oriented fund of funds and they may redeem but again they won’t redeem everything plus they will also have to choose in the last few months whether they should redeem from the market which is doing a little better, which is India or they should redeem from other markets which have already done badly in recent days. They can’t sell their Russian investments for the next few days or for the last few days, they will be frustrated, so they may sell that too. If they themselves have redemptions, they may sell us because they can’t sell Russia but in general the BRIC thing has been shaken.
India is way ahead of everybody else. Indian financial system because of Securities and Exchange Board of India (SEBI) and few others is very strong. India doesn’t close its market when there is a fall in the market and things like that. I don’t know how many PE’s to reduce from Russian PE but India has much better bottom up governance and systems in place comes through. We have to see where they redeem from but in general there must be pressure right now.
Q: Are you worried about core earnings since we are speaking about bottom up? Has anything changed in that view in terms of either access to capital or any pressures that you see for the system which has made you change around your portfolio significantly?
A: We have changed a little bit in terms of stocks which were more oriented to open ended contracts, infrastructure, construction companies here and there and we were never much into cement and cyclical sectors . So in general, we have reduced the number of names that we have had. We used to have 50 names at the beginning of the year in our portfolio now we have about 34 names. Right now the bias is with any new money or even selling off some old names into larger names and so like that we have tinkered around.
There will be earnings disappointment but in some sectors it is well telegraphed. There is another positive about India relative to the world that in India, the real estate boom was restricted to corporates themselves. The real estate companies themselves did not spread so quickly to the rest of the retail investors. So, real estate declined around the world and has already led to declines here but the pain will be restricted to the companies and maybe a few lenders but not so much to individuals who have leveraged because they did not get enough time.
Fortunately, the real estate boom in India happened so quickly and was basically on paper that it did not reach the end investors. So, for India as a country and as a system it is a big positive that real estate prices are declining in India because we still don’t have that high ownership and it will help the businesses also. It will help the retail, IT business.
Q: Have you changed your view on upstream oil companies, the ones which are exposed to oil refining given what’s happened with crude?
A: We are bullish on Reliance Industries. There the story has got a bit delayed because of the gas production delay by few months here and there. In general for the next two-three years, if India has to become much better than it is today in terms of financial numbers one of the biggest contributors to that will be Reliance.
Q: You used to own quite a bit of private banks. I do not know about public sector banks has that view changed? Have you re-jigged that portfolio?
A: We kept only two private sector banks and we have bought two state owned banks in the last month. We bought some day before yesterday primarily on simple logic of mark to market losses. But, still the difference in my mind is those are trades. I will keep up and down with the world when I buy state owned banks; I keep them for some time but generally they are still trade based around events. But, I have bought.
Q: Have you shifted a bit away from the midcaps into the security of the larger names?
A: Broadly, that is true. Some of the midcap companies have continued to do well but there is no interest in them right now. I have interest in midcaps that I have and that would need more confidence. In any case market rally would first start with largecap, if it were to start and would be lead by short covering etc. So, midcaps will get their time and after the market is stable for a few months, somebody will buy my midcaps and I will buy somebody else’s midcaps and then life will move on but right now there is less interest in midcaps.
Q: Do you share the current gloom on IT because of what’s going on in the US because those stocks despite a fall in the rupee have got punished quite a bit?
A: If you look at it, they haven’t punished quite a bit. Infosys would be down 10% year to date and 10-15% in the last few months when the market was down 4-5%. In general, there is confusion about whether to give value to the rupee that has depreciated or to the fact that US customers are disappearing. So, we have reduced our weightage in that right now because we do not know which of those companies will survive. The numbers are secured for this year because of the fact that depreciation is helping so much but if somehow those clients shrink down quite a bit or for e.g. (a) if ‘A’ is bought over by company (b) who knows whether the company ‘B’ is this guy’s client or Infosys’ client or Wipro’s client and everyday who is going to track that. The events are so fast but it’s clear that BFSI (Banks, Financial Services & Insurance) segment would be shrinking for the next one-two years.
Q: You were quite bullish on some of the financial intermediaries, some of the brokerages too. Have you knocked them off your portfolio now?
A: We have knocked a few and kept a few because they fell a lot. The good thing about Indian brokers and even banks is that unlike in the West or even in China, these guys have lost a lot of money and they need money to recapitalise. So, HDFC Bank price to book maybe high but the banks in US have no book. We used to have stories about how HDFC Bank, which is one of my top holding, has such high price to book? Its price to book is 3.5. But, most of the banks in the world do not have book right now.
So in that sense, none of these guys have lost money. They do not need money to recapitalise. The money they raised last year or will raise next year is all for growth. Similarly, broking guys have not lost money because of investments; they have lost business which is related to volume of broking, IPOs (Initial Public Offering), private equity since these stocks fell so much and so fast in the first few months. Their weightage has gone down and I have not bought more and I am not buying more but it will pay off overtime. The pain was already taken in the first few months of the year and the business itself was not bad other than the fact that volume is down. So, that will come back overtime if we have to believe that India itself will do well.
Q: How long do you think it will take before you can become a table thumping bull again? When you will start feeing better about the market and not talk about tepid 8-10%?
A: That would be the middle of next year when the strong government and the year on year numbers are down. But, it depends on how you are looking at a bull market. Day before yesterday in US, people were getting negative return on treasuries and were paying money to the US government to look safe.
So in today’s context, India or I were up 20%. We would be the biggest heroes of the world. Therefore, a bull market in my mind is never an absolute return. It is much better than the others and in times which are very bad, being flat to normal growth would be enough. I am table thumping currently also because I have tried to protect from Russia and Brazil, where they have lost 40-50% in the last two-three months.
Source : MoneyControl
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