Samir Arora (Helios Capital) view on stock markets - October 2011

Samir Arora, fund manager at Helios Capital believes October is going to be a bad month for equities all across the board. "The European Financial Stability Facility (EFSF) expansion already factored into global equities," he added.

It has not been a good start to the month with Nifty seeing 1.5% cuts on the first two trading days. Arora feels the second quarter performance will weigh on Indian equities this month. "I think the result season, in general, will be bad," he said.

According to Arora, the government indecisiveness regarding its divestment plan is also not helping investor sentiment towards India.

So far, the government has been able to raise less than 3% of the initial target of Rs 40,000 crore for the year due to sluggish market conditions.

"The biggest disappointment in September was the way ONGC divestment was handled," Arora said adding, "...the road shows had happened in early September or August end when the markets had already gone down a lot. So, to suddenly say that the markets were bad, I think, was just an excuse."

"So if that is mood of the government that something, which is nearly done, gets undone, then on what basis are we supposed to look forward to events, approvals, parliament because things are in hand and then we walk away from them," he questioned.

Arora feels the current downtrend could turn out to be more painful than 2008 collapse. "We need a positive trigger for new uptrend in equities," he stated.

Are you looking forward to horrible October or do you think it may not be that bad? Are you bearish?

I’m bearish. Our analysts are optimistic that the market will fall. Even if somebody is right on the market for a short period of time, the fact that the overall market is down, hurts confidence, optimism and business to a greater extent. So being bearish helps me do a bit about what to do about the currency, about lack of complete investor interest. This is going to be a bad month, but we have played better this time.

Do you think the 4,300 level, which you were positioned for, may come in the next few weeks?

I was not playing for a certain level; since there is so much uncertainty, there is no point in being a hero. I’m not sure where this level will settle, but the result season will be quite bad because companies are dealing with various factors like forex exposure, high interest rates, lack of orders, etc. Hence, there will be disappointments. Even if a company posts a good result, it won’t be viewed as being predictive for future. So this month will be relatively bad, but hopefully, if the rest of the world gets some solution by the end of this month, then we could be less bearish and more bullish on the market.

The German vote got passed last week and markets are down 3-4% since then. How do you think that part of the story pans out?

We have been deceived a number of times by these events. We started with Bernanke’s speech in Jackson Hole, then President Obama’s speech, after that there was the FOMC meeting and now the German vote (on Greek bailout fund). It would have been evident if President Obama or Bernanke had a solution; then they wouldn’t wait for the next speech to announce that solution. The situation is quite terrible right now.

There is no a single, quick-fix solution anymore. Greek bailout package is not even a real resolution. The USD 440 billion EFSF, which was announced two-three months ago, was rejected at that time as the markets thought it wasn’t big enough. Geithner went to Europe and suggested that they should leverage it and now it clearly shows that it won’t be allowed. So, the German vote was a legal approval of something that had come into the markets about a couple of months ago, and at that time, it was perceived as being insufficient.

Do you think it’s a long haul problem and not just a fall to a particular level, and then, we bounce off next year?

Secondly, the price of ONGC has not fallen too much, it was about Rs 260; it used to be about Rs 275. So, look at the way our government is handling issues; it goes on a road show in a bearish time, it finds support for the issue at maybe 3-5% discount and on the last day, it suddenly says it is not doing ONGC neither BHEL. So, we are supposed to start evaluating BHEL without any reason being given to us as to why the previous issue was cancelled. It happened because the government didn’t want to give up its control on the financials of ONGC; it didn’t want to put a limit on how much subsidy it can be asked to pay, etc. So if that is the mood of the government, then on what basis are we suppose to look forward to events, approvals, etc?

Would you say that lack of government support is the number one reason behind India not being in such a favourable scene today?

L&T lost Rs 400-500 quite effortlessly over the last one month, what's going wrong there?

It's the macro factor; nobody believes that the orders are coming. There are no orders in India. There are no orders in Middle East. The same thing is happening with Voltas . It is clear that nothing is moving on the infrastructure front and L&T is the best representative that highlights problems of the infrastructure sector. A couple of years back, revenues were coming from orders, but you need to fill the pipeline. But how will the projects get done when there are issues like high interest rates, pessimism and poor equity markets.

Do you see significant outflows from India over the next few months? What kind of gauge of risk are we working with at this point of time?
It’s difficult to take a call because it has not happened this year. The net flows are around USD 100-200 million for this year because we didn't get money in the first five-six months, and thus, this money is more stable. However, the money flows don't really matter so much. For example, without any outflows the market is down this year.

In 2008, the net institutional flows into the market were positive. FII flows were negative but mutual fund and insurance flows were positive, but it still didn't help. As of now, we would think that since it hasn't happened for eight-nine months, hopefully the outflows won’t create one more order problem. If they have handled this much pain before, then maybe they are committed to us in some sense.

You have the flexibility of running shorts and longs. Which sectors or which kind of clusters are you running your shorts right now, the bearish positions?There are too many shorts right now. We have nearly 27 stocks short including Coal India. We are short on metals, infrastructure, PSUs, etc.

What about private banks, they have also started doing poorly over the last few days?
Yes, we don’t own private banks. Our net is quite low right now, around 20%.

That must be the lowest you have had in the last two years?
Yes. When the Greece crisis came up last year, we were above this level. March was a good month, but after that we lost some percentage, and since then, it is the lowest.

What is the fear that we end up in a 2008 kind of situation?

No, that is not my fear. I fear that what if the market falls and takes too many months to recover. Some stocks, which are trading in a narrow zone with strong balance sheet, will do well. We keep talking about double dip. Even the US GDP becomes minus 1%, the stock should not fall 20-40%. The world is worried about India that this will be not the same kind of recovery that we have been used to, and therefore, if you lose 15-10% and then it hangs around there, then there is no direction, people would get totally burnt out.

I don’t think it is like 2008 as there won’t be that kind of a sharp fall of 30-40%. It is never going to be a mirror image of what happened earlier; it is going to be different. In fact, this is more painful that 2008 because 2008 slowdown came after a bullish time of three-four years and so the optimism and confidence of the investors was much higher. Today they are burnt out, and if you give them some story about how India is going to be a great market for five years, they are not going to accept it.

Will the situation change in the next few months as the bulls have capitulated completely?
Possible. It needs an event, a spark. In 2008, when the initial package was approved, the government had rejected it for the first time and had then approved it. The market went up 15-20% in October, but it ultimately ended lower.

I’m not sure how EFSF will pan out, but these events can spark huge rallies. The market doesn’t have to go backwards like 2008, because there were more problems in 2008, and this slowdown is actually an outcome of that problem. We want to be in the game and we don’t want to be knocked out this time like it happened in 2008.

How are you dealing with the currency (Rupee) for the moment because it looked like it had touched 50 and gone back to nearly 48, the pressures are still there?

The rupee is not able to overcome because it needs to sell and walk away. This currency is overdone; it will come back in a couple of months. So if we can neutralize the market impact, take all the pain out of it. The market is down 2%, but the currency is already down and there is no hedge for that with us since to lock ourselves at this point would be too expensive.

How do you see longer-term investors in India or emerging markets approaching the situation now because the hedge funds have sold a bit. Long-term investors still tell us that India is a too good a story to walk away from, and therefore, they haven’t sold too through the year. Do you see capitulation happening from them at any point?

The fund manager himself may not capitulate because, in a relative sense, when he is comparing himself to the index in India, his end investors have to capitulate. However, it is also possible that they may not capitulate because most of these allocations are done by large asset allocation type models or by consultants, who would have certain percentage in emerging markets.

In a hedge fund case, whether our investors panic or not, we have to provide protection even though we are unable to. Long-term investors have to choose relatively. So that’s why I don’t feel that there will be a big panic picture from India because among the choices that the long-term investors have, India maybe still quite good.

You were speaking about the rupee, how have you translated that into your action in IT?

We don’t own any IT stocks except one company, which is Oracle. It is true that rupee depreciation helps the sector, but it may not help in an accounting manner in this quarter because the IT companies have to ultimately hedge. They have shorted the US dollar; they substitute when delivery is required with the revenue.

So if you short dollar at 50, you have to first consider market losses, which may not be economic in some sense because you will generate those dollars and fill it with your own revenue. However if you have shorted a lot of dollars in the short-term and dollar has gone up, then you will have an accounting loss. You will benefit economically, but not accounting wise, at least in this quarter.

It could be but on the other hand, the world is also quite bad. There is no independent reason for bearishness. If one of the two has been good, then you can overcome the other by saying that we will buy these kinds of companies; we don’t need government approval, etc. Our valuations have fallen to 10-8 year average, and secondly, when commodity prices correct, they help us, which is a defensive reason, but it is to do with the market.It’s a long haul problem. Indian market didn’t fall much in September, it only fell less than 2% or 1.5%. However, it was disappointing to see the way the ONGC divestment case was handled in September. The ONGC road show happened early in September, but that time the markets had already gone down.

Below is the transcript of the interview: