Samir Arora, the founder and fund manager of Helios Capital, expects the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) to secure a comfortable majority, and present a market-friendly budget focused on economic reforms in its next term. “So, we continue to be bullish,” he said in an interview. However, in the event of any political surprise, the markets will witness a significant downturn, requiring a substantial amount of time to bounce back. Additionally, any tax hike on equities, at the very least, will result in an equivalent and opposite price reaction, which would overshadow any other positives, Arora added. Edited excerpts:
Indian equities have run up considerably. Isn’t a big part of the positive outlook already been priced in? If so, what is keeping the excitement going?
Indian markets (NSE 500) are up approximately 18% per annum over the past five years against an average of 14-15% earlier. This can be justified by several reasons. India has become a big market, compounding over time, which can no longer be ignored. This has forced foreigners to look at it more seriously. Indian investors have also taken to the stock market since demonetization and covid, and are committing higher proportions of their savings into equities. India’s gross domestic product (GDP) growth is robust. Various reforms, digitization and formalization have helped the corporate sector. There is excitement around the possibility of further reforms, and improvement in ease-of-doing-business, cementing India’s position in a new world order, where people are disenchanted with China to some extent. India is the new favourite of global investors and corporates. All in all, India is doing good economically, and that is reflected in the stock market.
What is your pre- and post-elections strategy?
Our post-elections strategy has to be implemented now, though the final push will be done after 4 June. Overall, we expect BJP and NDA to comfortably form the government, and expect a market-, economics- and reform-friendly budget. So, we continue to be bullish. The only potential set back to this strategy (and it could be significant) is if the government decides to increase capital gains tax in any shape or form. There is a significant leak in performance due to these taxes, particularly for foreign investors, who do not pay capital gains taxes for investments in any other country. The largest global investors (sovereign funds and university endowments, etc., are tax-exempt), such as investors from Singapore, Hong Kong, and Dubai, look at post-tax returns. Even though the Indian market generally performs well relative to other markets and countries, considering post-tax returns, it does not do as well. India is at a stage where it needs higher and higher risk capital from all possible sources.
Which are your favourite sectors or themes right now? And, why?
Out of the bigger sectors, we are most bullish on financials, and most negative (and have been for nearly two years) on information technology. In consumer sector, we have kept away from consumer staples (barring ITC), and consumer durables. We don’t think it’s wise to assess businesses based on short-term factors such as summer months prompting increased purchases of air conditioning units. Among other sectors, we have been most bullish (against our history) on oil marketing companies, due to very cheap valuations and prospects of privatization. Additionally, we favour select stocks from the food delivery and defence sectors.
Are there any sectors you think investors should avoid at the moment? If so, why?
People will lose a lot of money in thematic sectors such as solar panels and drones. It is sometimes easy to see that some stocks are being rigged, or at least their price movements are highly suspicious. They should be totally avoided.
We are seeing a flurry of listings. Do you see any of these companies having the potential to become multibaggers in the future, based on their fundamentals??
Many stocks will become multibaggers from both newly-listed and already-listed stocks. For some reason, people look for value only in new listings. However, considering that stock listings nowadays generally occur after early financial investors have extracted substantial gains, there is no reason to believe that newly-listed stocks offer better growth prospects and valuation. We normally do not participate in new listings because of the unnecessary hype around listings.
Do you see any potential threat to inflows and investor enthusiasm?
If there is any political surprise, the markets will take a significant hit, and it would take some time to recover from. Separately, any tax increases on equities will have, on a minimum, equal and opposite price reaction, and will override any other positives.
If the NDA doesn’t get a majority, do you anticipate a correction? And, should one buy the dip?
NDA not getting a majority is a very low probability event. Though, if that happens, markets can fall up to 30%. A recovery from there would take around two years.