Samir Arora, the founder of Helios Capital, a PMS firm based in Singapore, noted that market returns have remained consistent in annualized terms over the past two years, aligning with returns over various periods.
Samir Arora, the founder of Helios Capital, a Singapore-based portfolio management services (PMS) firm, offers his insights on the Indian market’s performance and valuations. As the S&P BSE 500 Index concluded the year with almost 25% returns, Arora points out that the market returns over the past two years have been in line with historical trends. With Helios Capital venturing into mutual funds in India, Arora expresses his cautious optimism regarding the current market valuations and discusses the factors that concern him about the upcoming month of January.
Market Rally and Earnings Growth Prospects
Arora anticipates that going into the new year, market returns may range in the mid-teens, aligning with historical trends. He underscores that over periods of 5-6 years, annualized returns in the mid-teens have been commonplace for Indian markets. Emphasizing the correlation between earnings growth and expected returns, Arora suggests that the current year could yield better returns due to simultaneous buying from foreign institutional investors (FIIs) and domestic institutional investors (DIIs). However, he cautions that excessively higher returns driven by increased flows may necessitate lower returns in the future. Arora stresses that sustained annualized returns over longer periods are typically not significantly higher than earnings growth. Despite the potential for higher returns, he expresses apprehension about the heightened market activity and inflows in January, particularly with the commencement of the earnings season.
Market Valuations and Rupee Performance
Assessing the market valuations, Arora justifies the current levels by highlighting the 25% and 4% market upswings in rupee terms over the last two years. He notes that the relative stagnation of large-caps, financials, and information technology (IT) stocks has contributed to the overall modest valuation increase. Importantly, in dollar terms, the BSE 500 Index has only witnessed a 20% surge over the same period, attributing this discrepancy to the rupee’s depreciation by 10%.
By providing his insights on market returns, earnings growth, and valuations, Samir Arora sheds light on the current state of the Indian market and its potential trajectory.
Managing Interest Rate Expectations in India
Despite the prevailing high interest rates in India, the economy has not shown any significant pressure points. However, anticipation of the US Federal Reserve implementing interest rate cuts brings a sense of relief to India, potentially alleviating the need for rate hikes and addressing currency concerns. The US is eyeing three potential cuts, but their execution may not materialize within the first half of 2024, presenting an opportunity to pursue their objectives. Yet, the burden of past excessive measures demands a cautious approach to gradually withdraw old quantitative easing. Maintaining a monetary buffer in the absence of a crisis appears sensible, allowing for greater flexibility in the future. However, some analysts project that the US rate cuts may commence from July 2024, an assertion met with cautious acknowledgment.
Mitigating Global Concerns Impacting Markets
The past year witnessed markets contending with various global concerns. Contrary to expectations, the apprehension about high interest rates inhibiting economic growth did not come to fruition. Now, as sentiments turn towards the conclusion of the high-interest rate phase, any uptick in economic risks could lead to a more severe negative impact. Moreover, the previously looming specter of the Israel-Hamas conflict escalating into a regional crisis has abated, contributing to a more stabilized environment, at least for the time being
Betting on Financials and Shifting Away from IT
We maintain our bullish stance on financials, while our confidence in the IT sector has waned. Despite consecutive disappointments, IT stocks have continued to climb, raising concerns, especially with the sector experiencing its first hiring shrinkage in 25 years. Recurring downgrades and budget allocation shifts in the US have contributed to our negative outlook. Recent reports indicate that while IT budgets in the US remain steady, a portion is now directed towards artificial intelligence (AI), leaving the remainder to face cuts. Given the current dominance of non-AI activities in Indian IT, our optimism towards the sector has significantly diminished.
Have you decreased IT positions in your PMS?
We have progressively reduced our IT positions, nearly eliminating them since June 2022. Previously holding 15-20% in the sector, we have divested entirely, initiating cuts in January 2022 and finalizing the process by June 2022. Subsequently, we made a minor 3% allocation to a single IT entity within our portfolio.
Where have you reallocated funds?
In response to our reduced exposure to IT, we bolstered our existing financial holdings and ventured into investments in public sector companies (PSUs). While we typically steered clear of PSUs, we identified compelling opportunities based on factors such as valuations, dividend yield, and growth prospects, prompting us to diversify into this sector.
Exploring New Investment Avenues in the Financial Sector
We have recently diversified our investments by acquiring stake in market infrastructure companies and a broker-type business. This strategic move is intended to capitalize on the increasing retail participation in the financial markets, the surge in demat account openings, and the escalating speculative trends.
Moreover, we haven’t made any investments in asset management companies (AMCs) thus far, as we continue to assess potential opportunities in this sub-sector.
In response to the evolving consumption patterns in India, we have realigned our investment strategy to reflect the growing consumer emphasis on experiential spending. Consequently, our portfolio includes holdings in hotel, railway, and airline stocks, all of which are strategically positioned to leverage the burgeoning travel and leisure sector. With a cautious stance, we are approaching investments in consumer durable and staple categories.
The establishment of our mutual fund house in 2023 marked a significant milestone for us. As we move forward, our investment philosophy for the newly launched fund will mirror that of our Portfolio Management Services (PMS). Emphasizing a prudent approach, we prioritize avoiding investments in companies exhibiting poor valuations, unfavorable earnings projections, deficient corporate governance practices, or a history of underperformance. We steadfastly adhere to this philosophy without making any compromises, as we firmly believe that any of these negative attributes can significantly impact a company’s potential for success.
