'Next trigger for market has to be related to economy opening up'

Arora believes the next few triggers for the markets have to be related to opening up the economy and the strength or otherwise of the underlying recovery

Singapore-based SAMIR ARORA, founder and fund manager, Helios Capital in conversation with Puneet Wadhwa shares his views on the pace of recovery in the markets since March 2020 low and his sector preferences amid the Covid-19 pandemic. Momentum investing, he says, is strictly for technical traders and perhaps retail investors, who cannot control themselves. Edited excerpts:

What are the next set of triggers for the markets?

Pace of recovery in markets worldwide has been unprecedented and no one could have anticipated the extent. It has generally been said that investors should not time markets and stay invested, but still this rally has been absolutely staggering. Next few triggers have to be related to opening up the economy and the strength or otherwise of the underlying recovery. We also need that there not be a strong second wave and that somewhere in the horizon there be prospects of an effective vaccine. 

How concerned are you with the rally in the absence of corporate earnings?

We are not too concerned for current year's earnings, as problems affecting various sectors/companies are well known. There may be some difference with the market on prospects for many companies in the medium-term, either due to a difference in view on the shape of the economic recovery or its pace, or the potential for temporary or permanent disruption in a few sectors. 

Has stock picking become more difficult in this backdrop?

Stock picking has become more interesting in these times. That there will be massive differences in sectors and stocks over the next few years. 

How long before the reality of economic contraction catches up with the markets?

All investors need a model – whether formal/informal or a mental model – to reconcile what is happening in the macroeconomic background and to equity markets. It is not enough to say that we are bottom-up investors and do not care for what is happening to the macro economy in which these companies operate. One way to look at our and world economy is to look at it as a K-shape  recovery, where some sectors are moving up and some others are on the way down and both exist in parallel. Covid-19 has accentuated trends that were happening slowly even before the pandemic. Anticipating these trends and seeing how far they can go is very crucial to understand in current times.

A large part of the rally in Indian markets at the index level has been led by Reliance Industries (RIL). Is the over-exuberance justified?

RIL has justifiably done well this year, but the market breadth is now quite good and I would not classify the rally this year is as dependent on just one stock. However, it is totally true that RIL may have started the rally for at a time when there was total despair in the market and economy. The company attracted very big and high profile strategic and financial investors, which changed the sentiment towards India itself.

How are foreign investors looking at India now as an investment destination?

India is clearly attracting good inflows from foreign investors. Even at the peak of redemption outflows, India's share was much lower than the redemptions from peer emerging markets. 

What should investors chase now when they scout for investment-worthy opportunities – value, growth or momentum?

To each his own. However, we normally prefer growth businesses if we can justify its valuations at some level. Momentum investing is strictly for technical traders and perhaps retail investors, who cannot control themselves.

Are banking stocks factoring in a possible rise in non-performing assets (NPAs)? 

This is the most crucial factor holding back the full recovery of the financial stocks. All the big private sector banks are well capitalised and have raised new capital, so there is no worry about them being able to withstand default shocks. On the margin, financial sectors look very attractive for they are still down in the 20 to 40 per cent range year-to-date and many of their problems may have been already discounted. 

Your view on how things are unfolding for the telecom sector?

Telecom sector uncertainties are now out of the way and India will have a three player market for some time at least. The sector should do well, or at least this is what we think.

What has been your investment strategy since March 2020 low?

The underlying recovery of the urban economy will be slow. There will be a shift of expenditure to buying things for home. Automobile sector recovery will be much slower-than-expected. Some sectors will be disrupted enough to make the businesses unattractive to own. Zoom will change life as much as Netflix has done. Travel will not fully recover for one to two years. India will gain a lot from ‘China + 1’ strategy of global companies. The new PLS scheme of the government will make a material positive impact on manufacturing sector. We will not easily go for movies unless it is a James Bond or a Nolan-type movie. With all these views and a few more, we have accordingly altered some of our pre-Covid-19 positions and preferences. 

Will the global financial markets behave differently in case the US presidential election sees a change of occupancy at the White House?

Right now, it appears that the markets are comfortable with either candidate; although in the last few days, there are reports that chances of reelection of President Trump are higher than what it may look from plain poll numbers.