Global factors biggest risk to Indian markets: Samir Arora, Helios Capital

Right now, the rupee and oil prices are strengthening the investment case for India with signs that the rupee's weakness has run its course and oil prices having corrected sharply, Arora says

The year 2018 turned out to be a volatile phase for the Indian markets that grappled with trade war fears, wild swings in oil prices and the outcome of various state elections, among other things. Singapore-based Samir Arora, founder and fund manager, Helios Capital, shares his views with Puneet Wadhwa on how the markets are likely to play out in 2019 and his sector preferences in this backdrop. Edited excerpts:

What is your outlook for 2019?

We feel reasonably confident about 2019. Even 2018 has not been very bad for diversified Indian equity investors – particularly for those measuring their returns in Indian rupees. Large-cap indices are down less than 3 per cent and even mid-cap indices are lower only in the 15 to 20 per cent range. This is part and parcel of investing in the equity markets where investors made as much as 40 to 50 per cent return last year.

What are the chances that investors will see negative returns from these indices in 2019?

In the absence of an external shock, there is low probability of having deep negative returns in 2019. For investors putting in money systematically, this is a good period to continue with their investing strategy.

So, what are the key risks to Indian equities over the next one year?

As of now, the biggest risk to Indian equities are global factors. US markets, which are down 20 per cent from the recent highs, signal a bear market. Half the time, these are corrections in a normal expansion and rest of the time these weak markets are a precursor to recession in the following year. If the US does slip into recession, the market there can fall another 10 per cent or so. In such a scenario, the Indian markets may outperform but is unlikely to go up substantially. 

How are the foreign institutional investors feeling about India as an investment destination now?

The biggest irritant for foreign equity investors in India is when the rupee weakens. Equity investors know how to deal with weak markets for they have a wide variety of stocks to choose from. However, continuously weakening currency is a big drag on the sentiment. Since we believe that the rupee’s weakness is unlikely to pose a problem again in 2019, we feel much more confident about 2019 with respect to foreign (and our) flows into India.

What is your interpretation of the recent developments in the US and its implications for the global financial markets, especially India?

If the sentiment in the US remains weak, expectations of a rate hike by the US Federal Reserve (US Fed) may slip from two hikes to one in 2019 – and that would be dollar negative, but positive for emerging market currencies, including India. In 2018, foreign investors were selling stocks and domestic investors were buying. We look forward to 2019 where both the groups are buying with the background of low oil prices, improving earnings and lower interest rates.

What are your expectations from the upcoming Budget in February?

This budget will technically be a vote on account, although we have seen past finance ministers change taxes in election year budgets. 

After the Congress’ win in the three crucial states in December and on the back of farm loan waivers, markets would be pleasantly surprised if there are no dole outs. So yes, the market is prepared for this, provided it is not too excessive. 

The government may, however, try a direct a cash transfer scheme to farmers and depending on its size and mechanics, the markets will deal with it accordingly.

Do you expect the rupee and oil prices to weaken the investment case for India?

Right now, the rupee and oil prices are strengthening the investment case for India with signs that the rupee’s weakness has run its course and oil prices having corrected sharply.

Your sector preferences?

We normally invest only in three themes and these are financials (private sector banks/insurance/non-banking financial companies or NBFCs), consumer (all kinds and broadly defined) and exporters (technology/pharmaceuticals). Once in a while, we may invest in select infrastructure stocks. Most of our stocks get covered by these themes.

How are you looking at the developments within the bank and the NBFC space?

Although many issues related to powers of the Reserve Bank of India (RBI) vis-à-vis government are not black and white, I think everyone can agree that interest rates in India are high. We expect the RBI to cut rates by 25 basis points (bps) and with room for another cut if oil prices remain this low. The NBFC problem has largely been averted and they should limp back to normalcy by the March quarter. However, their earnings growth will be lower than in the past due to higher cost of capital, cautious stance by managements and markets rewarding cautious/disciplined behaviour rather than just high growth.

What is your view on the mid-and small-cap segments? Which sectors / stocks in these two segments seem investment worthy?

We don’t like to buy stocks only because they are mid or small cap. If a company is large within its sector or niche, we are interested  but not if it is a small company in a sector where already there are many larger companies doing well. As always, none of these are hard and fast rules.