what to buy: Why Samir Arora wants to reduce holdings in digital plays, consumer stocks & go for financials
In isolation, Friday was a terrible day, markets really sold off. But after a 15% run up since the Budget, does it appear like just a bad day?
Exactly. You want those days to have happened in February itself because otherwise we will have a great February and as a fund manager we want consistency. I was very happy. If that is a correction, it is best done in February where you still have near double digit gains for the fund and everything.
As fund managers, we are not only trying to maximise the returns as of today, but also worrying about a new investor who may have just come in or who comes in tomorrow. Even as an individual, I do not think it is great to have everything happen in a very short period of time because we will be investing again and again, month after month. Steady returns are always more welcome.
How much importance would you pay to all the spikes which the US 10-year paper has seen? Do you think this is just a momentary risk adjustment and we should look beyond this?
I think we should. I read a number of reports from foreign brokers on this topic and the conclusion is if we look at the from say 2004-2006, the interest rates were hiked 17 consecutive times in the US and they peaked at around 5.25% from 1% in 2004. The best period in our life has been 2004-2007.
If we look at the day-to-day 10-year bond going up and down, the general conclusion is if the rates are going up because the economy is improving, then it is going to happen because pre Covid the rate was something like 1.8-1.9%. Remember we can’t be surprised if the rates start going up as we are in an unlock trade which has seen stimuli followed by cyclical recovery.
As the economic recovery is good, it is only reverting to what it was before and therefore I do not think this negative will be the main reason why the markets would fall, if they do.
Global interest rates plunged post pandemic, liquidity was in abundance. Now the global interest rates have come back but the underlying flow of liquidity is still huge. Where will that move?
First, rates have not come back all the way. In the US, the pre pandemic rates were 1.9% for 10-year bonds. It went down to 0.5% and now it is 1.4-1.5%. So, if the US economy is supposed to go back to pre Covid levels now or in the next few months, then it is reasonable to say that by November, December, the US rates will go back to what they were pre Covid. But in between, there is this extra liquidity and the Federal Reserve is saying they are comfortable with it. Therefore this party will go on and overtime they have to gracefully withdraw. Then we will see what happens, but that may not happen for a year or more.
It will depend on the path. If they say that they are not buying new bonds and slowly will withdraw $25 billion a month of bonds and all that, at that time whatever the situation of the economy, the market will have to temper it down. But if the Federal Reserve says that they are not doing it now and not in the near term foreseeable future, that means for next nine to 12 months, there will be enough liquidity.
How much selling pressure will domestic investors be able to cushion, even if it is not immediately down the line?
Right now, we are totally dependent on foreign investors because the domestic guys have been selling for nine months. They should say that we hope that the foreign investors continue to invest. In the meantime, the domestic guys feel that maybe they are overdoing their selling and start buying. The positive thing is that we do not have everybody who could buy stocks in India, buying right now.
In fact, for the last seven, eight months, there has been massive selling by domestic funds and massive buying by foreigners to keep at least those flows more or less balanced. So India is in a slightly better spot these days because we all believe that the Budget was good but even to continue with that, you will need the support of both foreign and domestic investors. The first trade, which was related to the Budget, has played out very well.
Right now, we are thinking that we have to reduce these totally forward looking digital plays and consumer plays with 70 multiples and buy a little bit more of financials which already are very high. We have added even more on Thursday and Friday and maybe increased it by 4-5% to nearly half of the fund.
There seems to be some plateauing of demand at least on discretionaries. Do you see that as a trend ? We were watching out for an uptick on the urban front or some signs whether or not consumption will pick up?
I do not think there is recovery in this. This is all pent up demand. Even in case of paint industry, the numbers are high but total paint demand has not changed for two years. The growth in paint that was supposed to happen in the Covid period, has got postponed. By definition, even if the overall demand is the same when you look at it purely on a year on year basis, the numbers will be more. I am talking about paint since it seems to have a defined market. There are so many people who want to paint and it got postponed.
Coming to cars, we do not have any auto stock other than HCVs because we think that the industry has been disruptive. In today’s Singapore papers also they are saying that overtime we are going to become a car light economy. We means the world in general and my whole thesis is that 70, 80, 90, 100 stocks do well each year and therefore we will buy only those stocks which we believe have both a big picture longer term story and a shorter term story in terms of general month-to-month or year-to-year numbers. Many people tell me oh! you did not buy this auto stock, it was up 25%! I say true, but it is not that that money was kept in a bank and therefore we lost 25%; we bought something else and may be that also went up either 20% or may be 30% because the point is, we will buy what works for us in terms of rationale analysis of both long term and may be month on month numbers but not only month on month numbers.
You were very intrigued by what Bill Gates has to say about Bitcoins and if he does not have as much money as Elon Musk, perhaps you are better off staying away from it. Are you endorsing his view?
I am totally endorsing. I am an old fogie. But if you want a really nasty one on this, then read Charlie Munger’s interview. They asked him between Bitcoin and Tesla what would you choose? He says between a flea and lice, which one is worse? We are old fogies. We do not believe a bit of this Bitcoin because nobody has been able to tell me in plain English what is the benefit other than saying you can transfer money, which I guess we can do now any way in India. If you say that we will do it internationally, then most governments would come in and stock. One of these the biggest risks in Bitcoin is that it is too successful and that the governments clamped it down. You cannot seriously think that you can fight the governments. No way, governments will allow it. But forget the governments. Before that, there has to be some logic other than the fact that five million people want to buy it.
I cannot get over what Charlie Munger had to say but are you tempted to buy the current decline in the markets? If it worsens, would you buy more of the same?
As I said, we already did on Thursday-Friday but more than that was a shuffle which was to say that very high PE companies by definition get hurt because interest rates have to go up and do not say that in India they are not going to go up. The good thing about us managing US money is that broadly we see what is happening there and plus minus 25 days, it happens in India. You do not need anything more than just understanding which kind of stocks are doing well in the US and adapt it to India or may be to other markets also. But I do not do other markets as specifically Korea or Taiwan or something. So broadly we have bought same things there also and here also. We had maybe 40-43% in financials. Now it may be 48%.
October has been good, December has been decent, January okay, February volatile what kind of market do you think we are in for rest of the year?
January was a sort of a down market. February was a great market but in general, one cannot have a one-way market anymore because that is where the tension will come between the fact that you may have economic growth but the market is not growing that has happened many times in the past, not only in India but in general.
Many times it has happened that the economy is doing well but people find other places to put their money. If real estate is doing well, maybe 10% of people want to go and buy real estate. There are so many times we have all got hurt because we were only looking at our stocks and saying that this earning is going to be good. In 2008, HDFC Bank earnings grew 32% and the stock fell 52% in rupee terms and in dollar terms because the currency itself depreciated around 19%. In 2008, effectively our number one holding was down 60% while we were feeling happy and telling the world that see what great stock we have found because it has grown 32% that year.
Also there has to be a mix and match of macro and micro up to a point. This time, the macro analysis will have to be a little bit more because these flows and all are coming from a macro angle. Nobody is really over analysing India versus others when they say we are putting in emerging markets and some are putting it specifically in India. What I mean is when we say that this year is the year of emerging markets and this is the year of dollar weakness, that effectively is all macro analysis and the macro will be driven by what the people in the US think about macros. We have to worry about all these things — new preferences, interest rates, 10-year bond blah blah even Bitcoin because if Bitcoin and Tesla were to fall, many other stocks which are in the same camp as Bitcoin being a high beta NASDAQ stock may fall. It will be difficult to say that these things fall 20%, but a stock which is trading at 100 times in the US does not fall. So, it is going to be both difficult but at least the start has been good thanks to the Feb.
