scorecardresearchCurrent market rally is fair but the pace of returns unlikely to be sustained,

Current market rally is fair but the pace of returns unlikely to be sustained, says Samir Arora of Helios Capital

Updated: 10 Aug 2022, 08:18 AM IST
TL;DR.

We expect the market to deliver a 13-15 percent return per annum, annualized over the long term, says Samir Arora, Founder & fund manager, Helios Capital, Singapore.

Samir Arora, Founder & fund manager, Helios Capital, Singapore believes that this is a good time to build the portfolio and invest. 

Samir Arora, Founder & fund manager, Helios Capital, Singapore believes that this is a good time to build the portfolio and invest. 

High P/E without much higher growth does not work in any market. Ultimately, in buying a stock one is exchanging cash for the economic benefits of owning the stock. Those economic benefits do not come from a good "story" unless the story really plays out much better than expected. In an interview with MintGenie, Samir Arora, Founder & Fund Manager, Helios Capital explains how high valuations can prevent even a well-performing company to give good returns to shareholders till the valuations become normal and can lead to underperformance for many years.

Edited Excerpts:

Q. Some market experts are suspicious of the current market rally. What's your view on this rally?

In the long term, Indian markets have traditionally given approximately 14 per cent return per annum in INR terms. Investors have to invest with this long-term performance track record of the markets in mind.

In the short term, one may have different views on the short term but this will not materially change the long-term performance.

We believe that the current market rally is fair but the pace of returns that markets have given in July and the current month are unlikely to be sustained. This is a good time to build the portfolio and invest and over time one should expect better returns from equities than any other asset class.

Q. You have bought a good number of shares in Zomato. Clearly, you are bullish on the company. What's your view on the time horizon for the stock to give some meaningful returns?

We own 30-35 stocks in our portfolio under two categories: "High confidence that we will make reasonable returns" and "Reasonable returns that we will make high confidence". In the first category, we buy 10 odd blue-chip companies with a weight of approximately five per cent per name in our portfolio. In the second group, we own approximately 20 companies where we buy two per cent per name and hope that a large number of them will do well for us. We cannot talk about individual stocks.

Q. Do you think Indian markets and frontline stocks are overvalued? Does a high PE really matter in the Indian context or do investors here prefer a good 'story' and future prospects over current valuations? What do you prefer?

We do not believe that the Indian market is overvalued. In the end, everything depends on individual stocks and a large number of stocks are in "fair" valuation territory. We like many stocks in the financial, consumer and IT sectors and are confident that they will provide above-market returns in the medium to long term (and hopefully even in the short term, which is otherwise much more difficult to predict).

High P/E without much higher growth does not work in any market. Ultimately, in buying a stock one is exchanging cash for the economic benefits of owning the stock. Those economic benefits do not come from a good "story" unless the story really plays out much better than expected. In general, high valuations can prevent even a well-performing company to give good returns to shareholders till the valuations become normal and this can lead to underperformance for many years.

Understanding the valuation of the company is a key part of investing. Warren Buffett has said, “For "the investor, a too-high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favourable developments”.

Q. You are quite invested in real estate as well. What's your view on the three REITs that are currently listed in India? Which one gets your attention and money?

Our fund buys only listed stocks. I personally own some real estate (mostly my own primary residences in India and Singapore). We do not invest in REITs in our fund but I think they do make sense for individual investors to own, primarily for yield with some upside.

Q. On the global central banks and RBI, what's your view on the fight against inflation? Do you think central banks are behind the curve?

US Federal Reserve may be behind the curve but in their language, they have communicated clearly their future stance, so now that is less of an issue. The US inflation relative to their goal and relative to their current interest rates is very significantly off relative to Indian inflation relative to its normal level and current interest rates and therefore we believe that inflation is a much bigger issue for the USA than it is for India currently.

Q. Do you have any Nifty target for the current fiscal year?

We do not have any targets for the index but expect the market to deliver a 13-15 per cent return per annum, annualized over the long term. This is a much higher return than what one can get from fixed income or even property. However, the problem is that this return does not come year after year but with volatility and therefore one needs to spend time in the market to earn this return. Our goal as fund managers is to deliver returns higher than the market return.

Q. What are the most important local challenges facing the Indian economy at the moment, apart from inflation?

Our biggest challenge can come from what is happening in western economies. If the US goes into a deep recession, it will affect our economy too for it will affect business for IT companies, capital flows etc. These days markets and economies are interrelated and we cannot hope to do well if other economies are doing badly. Having said that, we can easily handle a “mild recession” in the USA for that would lead to lower commodity and oil prices and easier liquidity and lower interest rates worldwide.

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First Published: 10 Aug 2022, 08:18 AM IST