Elections in other states next year not as crucial as Gujarat: Samir Arora of Helios Capital

The close verdict in the Gujarat assembly election will put pressure on the Bharatiya Janata Party (BJP) to deliver on infrastructure and rural-related issues, Samir Arora, founder and fund manager of Helios Capital, said in an interview.

State elections due in 2018 would not be as crucial as the Gujarat poll, Arora said and added that from a market point of view, the BJP would not have to win a super majority in 2019.

“Even if they lose a few seats here and there, but are still firmly ahead, we will have the same management at the centre for another term, and that is what the markets will ultimately bet on,” he said.

Edited excerpts:

India in 2018—what are the risks? Will it be upcoming state elections and oil, or will global forces be at play, too?

Generally, all markets and, particularly, Indian markets randomly have 10% type corrections even without any real reasons. This has not happened this year, but has happened frequently in the past. We expect more volatility in 2018 and lower returns than 2017.

2017 has been such a perfect year for markets that it makes many people—including us—nervous that how can something be so good and easy in equity markets. In addition, many small cap and mid cap stocks have had massive gains and any negative trigger—global or local, economic or political—could lead to a significant correction in these stocks.

Overall, we still expect and hope to make reasonable returns during 2018, but remain vigilant for adverse developments.

How do you see Indian equities in 2018? Are valuations a concern? Can the earnings momentum be sustained? Any concerns that the country may see a large markets correction?

Performance of Indian markets will depend on what happens to global markets. India can outperform global markets but we are not in a situation where we can go up while world markets are down over an extended period. In that sense, realistically we are followers and not leaders—US is the only real leader in this regard which does not need to depend so much on how other markets are doing to decide its own course.

On the other hand, there is no reason to expect that there is any serious India-related reason which can lead to a severe stand-alone market correction in India.

Will it be so easy to make money from the markets in 2018, as was the case this year? Do you share the view that any and every correction in the market is an opportunity to buy?

Money-making will not be as easy as it has been in 2017. However, making money in general should not be expected to be easy in any scenario. Investors will definitely buy into the first dip, for they are now programmed to do that; problem will come if there is a second dip, for we don’t exactly know how domestic investors will react if there is a sustained correction—i.e. will they try to lock in their gains by selling or will they invest more.

We are positive on the market for 2018. Globally, markets are doing well and, therefore, strength in Indian markets does not jar anyone.

Additionally, we have some more positives we can look forward to, including improvement in earnings, as short-term negative effects of demonetization and GST (goods and services tax) run down and general improvement in global growth helps cyclical sectors.

With regard to Indian equities, what are the sectors that you are overweight on and why? Similarly, what sectors are you underweight on?

We invest only in a few sectors and believe that bottom-up stock selection works best in sectors where there is strong tailwind. Our portfolio is invariably concentrated in financials, consumer and infrastructure sectors, and over the long term we have also liked technology/pharmaceutical sectors although for the past 18 months we have had limited exposure to tech/pharma. We generally don’t invest in commodity sector or in state-owned companies, but there is always an exception to these rules.

What is your reading on the impact of the Gujarat results going into 2018. How should investors view this and upcoming elections in 2018?

Gujarat elections were important from a market point of view and the result is positive. The most important outcome is that there is continuity of government and policies for another term.

The close result will also put some pressure on the BJP government to deliver on infrastructure/rural related issues with urgency, and that will be most welcome.

The other elections coming up in 2018 are not as crucial as the Gujarat elections was. We also believe that purely from a market point of view, the BJP does not have to win a super majority in 2019 for us to be positive. Even if they lose a few seats here and there, but are still firmly ahead, we will have the same management at the centre for another term, and that is what the markets will ultimately bet on.

Now that the big reforms are behind us, do you see Prime Minister Narendra Modi turning populist and shunning other big reforms till the 2019 general elections?

There are not many big reforms that we or anyone else is waiting for. If the government can sell off Air India to a strategic investor and hand over management control, it would classify as a big reform.

Otherwise, in any case, the government should focus on the implementation of previous promises. We believe that government should focus on more and faster road building, ironing out practical problems faced by businesses on GST, starting the process of cutting corporate income tax rates to 25% as promised, solving income tax issues of start-ups and generally pushing along programmes already announced

When it comes to India’s capex cycle coming back, most analysts have got it wrong for two years or more. What is your forecast here?

We don’t believe the capex cycle is turning. New companies everywhere are investing in new technology and creating new products and markets, but there is decline everywhere of old capital-guzzling sectors.

If Indian airline companies order hundreds of planes from Boeing or Airbus, the capex is not in India even though India is seeing growth. If SoftBank invests billions of dollars in Indian private companies, you see a lot of spending but a very limited capital expenditure. If capex picks up it will be good, but we are not wasting our time waiting for it with bated breath.

What are your expectations on foreign portfolio flows into India next year?

Foreign portfolio flows have been very small this year. We used to get an average of $20 billion per year previously. This year, flows have been muted; perhaps all markets are doing well and no one is feeling left out only because they did not invest in India.

Over time, flows will come back for India offers the potential for more sustained growth. It is also possible that portfolio flows are less because the same end-investor has instead chosen to invest in private equity and venture investments in India which are seeing good flows these days.

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