MARKET MAVENS | ‘IPOs don’t excite me,’ says Samir Arora

The Nifty and Sensex have recovered from their losing streak and the global markets are picking up on the ebbing of the recession fears of the US, with Goldman Sachs lowering the probability of the US recession by 20 percent. What is driving the Indian market space? What are the coming months going to look like for Indian markets probably? Mr Samir Arora, Founder, Group CIO, and Fund Manager of Helios Strategic Fund shares his exclusive insights with Republic Business.

Republic Business: Given your long journey and a long career as an investor does the Indian market still excite you? 

Samir Arora: I took a big bet in the 90s when I lived in the US and said that India looked good, and I got to enter their market. So to give you a big picture for the last 25 to 30 years, the Indian market is the number one performing human market in the world in dollar terms. So, India is looking exciting now. But generally, India as a market has done well even in the past, if you look at it over the last five years and ten years and 15 years and 20 years and 25 years in all these periods. India has done very well and is mostly number one except in the last few years. The US has done better than India. But India has done well for long. So, therefore, it is not a surprise that it is doing well now with both bottom-up reasons and good policies and new interests in India from the world. 

Republic Business: Given the way the market has been performing, what are a couple of tips to remain calm and calculated while making market decisions? 

The first thing is to understand that normally in the long run equity markets do very well compared to other asset classes and this is not an India story. There is a lot of data on this which you can find on the net that in any country the equity market returns compared to the fixed income government bond kind of return. The average difference between these two is five per cent per annum and this there you can see this data for 100 years. For some markets where 100 years of data is available and it works across markets and longer periods like 10-15 years, the only issue is that this return does not come smoothly. Never will you get five per cent more. Either you will get 20 per cent more or 15 per cent less which means either you'll be +20 the next year, be -20 and so forth. But over longer periods it comes to being five percent or so higher and this number is called Equity Risk Premium. So, the only thing to understand in the equity market is that on bad days do not panic, you may stop putting in new money, you may change your stocks, you may change your fund manager. But broadly understand that overtime equities will do better. 

So, once you accept that and if you don't accept it from me, please go and search on Google for equity in this premium across countries across periods it always works out broadly speaking like that, and therefore we say that the only thing to understand is that on bad days you may not add you may be nervous. You may even take out five percent if you are becoming too nervous. But broadly understand that over time equity will beat everything else. 

Republic Business: Over the years, you have had some very strong positions when it comes to certain sectors. What do you think are going to be the winning sectors for the Indian marketplace in the long term? 

First, if you look at the big picture, there are three sectors we drive in the world these are for like 70-80 percent of money and this is not only in India this would be true worldwide, but this will also be financial sector, consumer sector and tech sector. And how to know that this is true again? Look at the Forbes Billionaires list. So even for India, it will be this case that your three big themes for a large part of your money will be in consumer sector, financial sector, IT sector, and then now and then based on some government policies, some global issues, some local story you will say I like defence and I like commodities or I like something else, but those are never going to be 20-year-stories. The 20-year stories will be these three sectors’ big picture. Of course, once in a while, you may find something from there. So, we are always in these three themes by design. Overall, we still always like the financial sector as the number one consumer broadly as number two and IT broadly these days as number three. 

With the advent of artificial intelligence, and blockchain, the way people are betting on the market is going through sea change. Does it bother you or do you think it's a huge advantage? 

They are not using it to get into the stock market. You may invest in an AI company but very rarely, at least in India, we found people using artificial intelligence to invest in the market. Also, there might be a handful of companies that may invest in NVIDIA or some beneficiaries of AI. But broadly we are not using AI to invest in the market, yet we must see over time whether these models or systems can do better than fund managers. So far, we have survived well. The blockchain or if you are investing in some Bitcoin or other thing, those are competitors to our market, they are not our market, and I have no investment. I have no faith there. I’m interested in my market because as I said I've also got about 30 years of experience. Coincidentally, during these 30 years, the Indian market has been the best-performing market in the world. And then if you do better than the market, you're broadly doing better than literally anybody in the world. Somebody may separately invest. Please do. But the Indian market doesn't have those opportunities or even actually the world doesn't have so many of these opportunities yet. 

Republic Business: The entire world is interested in what is happening in India. So, if I am an outsider looking into the Indian market, what are my opportunities right now and what are my challenges? 

Samir Arora: The Indian market has done well in the past but now people are accepting it more because if you do well while you are big then they cannot easily ignore you. So, the thing is to do it with scale. It's like saying a small CA company where people say who cares, I don't buy small caps. Now India is the 4th largest market in the world and the 5th largest economy in the world now when it goes up 15 percent, a foreign investor can say I don't care because it's a big market and he could have invested say 20 years and he could have said I know you're doing well but you know you're too small for my big size fund and all that plus India is also getting the headlines. Plus, China is doing badly these days which is mostly to do with the policies that their government has taken. 

The fact that China is not doing well is also making India shine because ultimately in funds that are investing in India, many of them are investing in emerging markets and it was China previously. Therefore, people are observing that the interest is very high, and the challenge…that the Indian taxes for foreign investors are very high. Foreign investors when investing in other countries like any investor investing in some other country, basically the tax rate in that country for the foreign investor is in 100 percent of the other countries zero. So, for example, a US investor investing in China, a US investor investing in Korea, in Tainan, a Korean investor investing in the US and UK all have zero tax. 

In India, the tax state is there's no difference between foreign and domestic investors and that makes foreign investors a big challenge. Therefore, over time India has to do much better to have post tax returns similar and that is going to be a challenge. But still the returns are good. 

Republic Business: Talking about the global geopolitical situation and the American markets, the recent Goldman Sachs report has reduced the risks of recession in the US. How will all this impact the Indian market?

So first thing is that the US interest rates will start cutting from September and right now the issue is whether good news is good or bad news is good because if the news is very strong, about the economy, about unemployment being low, about wages growth being high or retail sales being high,  people say oh my God! now the Federal Reserve may not cut interest rates and so you don't know which you one to celebrate a little bit.  Basically, you want that is why they call it the Goldilocks economy you are not growing too fast for anybody to feel that the interest rates not be cut, and you are not growing so low then the rate that even the interest rates might be cut. But the economy is doing badly. So right now, it looks okay. And what India needs is not that they must do very well, but they should not do very badly as a market. What I learned after 2008 was that we cannot say we are an island. We cannot say. Oh, you know my company is not affected, my company does not sell to us. It doesn't matter what is the recession there or a bad stock market there. In the end we are all connected. If you're a little bit bad, little bit good, nobody cares. You can say we are independent; they are independent and stuff like that so far now they don't look bad, which is enough for us. There's no reason to feel negative on the US, either on economy or on interest rates or on corporate results. This thing that is a financial investment and the foreign investors losing there, how can they invest here? Indian investors will say the rest of the world is doing badly, we are re-living in our dream, and things like that. But so far everybody is okay. 

Republic Business: IPOs are on the market calendar every day. Not all companies entering the market can do well. Do IPOs excite you?

Sameer Arora: IPOs don't excite me previously my thumb rule all my life was always at once you have too many IPOs, that’s the peak of the market. But now what has happened is that the domestic flows which were not there in these previous episodes of a bull market are there to absorb it, but you're right. The big picture – you cannot have so many companies doing well simultaneously because it never happens. And now a days another issue is that the seller is not the company so that they can say okay, I'll sell 15 percent. I still own 80 percent of the company and when the stock does well, I will make money, so it doesn't matter what the price of what I sell for the first 10-15-20 percent. Now the seller is mostly a financial investor, a private equity fund. And the private equity fund. He doesn't have anything left, he wants everything now because he's also likely to buy a financial investor right, and he might have 5-10 percent, and there might be five such private goody guys. So even when they sell the first time, they're still there wanting to sell after three months and six months. And so, in many cases, this will not work. I think, but it's a go-run right now. So, everything is working. 

Talking about IPOs over the last couple of years, we've seen startups taking recourse to the market for a funding route, but some of them have been received shocking response while some have scraped through. But the market is very smart when it comes to fundamentals for those who are trying to go for it. And there are some startups which have not been able to make an entry at all despite trying multiple times. So, what is most important are the fundamentals of a company before it wants to foray into the markets.

The market will fund when that startup has some three four-year histories at least. To show that there is a path to making a profit, it doesn't have to make a profit on day one like Zomato also was not making, Paytm was not making, but they could at least show that we are nearly there or we'll be there in one year, two years then the market can handle start-ups means you are on day one or first year than the market. This is for private investors and these PE guys and venture capital guys and mostly high net worth individuals who are willing to. Stock market warrants. Broadly, they should be able to see that quarterly you will have this growth that you will not be saying that one quarter is up, one quarter is down, that kind of thing the stock market does not like and therefore in that sense our ability to see the fundamentals more because the market does not buy in the beginning. Which is why these prices fall. But one day you can say I'm going to start the mode, give me the money and let me try and work out, which is what happens when they get money in angel rounds where people are betting on the individual and the big picture idea, the stock market will not have that. That's why stock market is very good. It's much better than all these private investments that people make, even though you sometimes hear a private guy who invested in one has made a lot of money, but we are talking about collectively not talking about 100 people buying startups, one guy making a lot of money and 99 guys losing and the guy who's losing cannot tell you a story because he's embarrassed, and the guy who made 100 times and say he I made 100 times, but collectively they didn't make any money. The stock market is that broadly everybody makes money. 

Republic Business: India is becoming increasingly young and with that the age group which is now interested in participating in the market is in their early twenties. Being a veteran, what are a couple of tips that you have for this young age group so that they put their energies where it is wanted when it comes to navigating the market space? 

Sameer Arora: The first thing is that they overly are spending their energy on the market while they should first build their careers. Making money in the stock market as the way it has been made in the last 3-4 years is not normal. So please don't leave your job thinking that because you made 25 percent ten or 40 - it is not going to last. So therefore, the first thing is to bring down your expectations and the second is for most of them, other than somebody who turns out to be a student at this, it is to first concentrate on your career and then invest your surplus or your time or make it as a hobby or spend two hours a day. I think that is important because right now what happens is that you as a percentage make a lot of money for the first few years because of having started in a bullish time which is post-Covid. The overconfidence of the young I can see on Twitter and that is not going to last, they will have to pay a learning fee someday. There is no way you can escape that unless you now become disciplined.