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Stock market response to election results was disappointing: Samir Arora

LiveMint logoLiveMint 16-05-2014 Ira Dugal

Mumbai: After an initial surge, when the benchmark Sensex crossed 25,000 points, the Indian markets closed marginally higher despite the National Democratic Alliance (NDA)-led by the Bharatiya Janata Party (BJP) returning to power after 10 years with a massive majority. Narendra Modi, who is set to be India’s next Prime Minister, is widely perceived to be business-friendly. Samir Arora, founder and fund manager of Singapore-based hedge fund firm Helios Capital, said in an interview that this showed the short-term nature of the Indian market, which should nevertheless gain as foreign allocations to the country increase in the next 9-12 months. Edited excerpts:

What do you make of the market’s reaction?

The market’s reaction today was disappointing. It shows the short-term nature of the Indian market. People had played on an event risk and built up huge positions in anticipation of the event, and then when the event happens and delivers even better than expected, you go and sell for a 1% gain? That just shows how shortsighted some of the players in the market are.

Does it say that maybe the market is tired and the potential for gains is limited?

Not at all. This is mega, mega shift that we have seen in the country and over time the markets will respond to that. Today’s market response was disappointing but let’s not read too much into it.

There was one theory in the market that the completely one-sided verdict has raised concerns about whether the new government would follow a right-wing agenda. Would you give any credence to that?

Many people when they get married get worried about the fact that 30% of marriages end in divorce. But that is ridiculous. You can’t not get married because somewhere down the line there is a possibility of a divorce. People are just cry babies.

Beyond today, what do you expect from the market now that the event risk is out of the way?

For the first time in a long while, we are seeing a mega shift in India and in the thinking in India. The public has very clearly said that they are voting for strong administration and good governance and that is a big message. What this will also mean that for the next many years, political parties in India will fight on that governance plan. Even at the regional level it will send a message and you will have parties like the SP (Samajwadi Party) and others trying to fight on the same issues. That’s a huge change and it can only be positive for India and hence the markets.

Markets tend to be fairly impatient. What would the new government need to deliver on to avoid disappointing the market?

Firstly, I think we should recognize that the country has chosen a good CEO. When a company chooses a CEO, it doesn’t matter if he comes from outside or from a subsidiary. What matters is that the new leader should show strong leadership qualities and have a proven track record of success. Narendra Modi has both. He has shown success in Gujarat, we have seen over the last six months that he works hard, and he is articulate and motivating in the manner in which he communicates. That’s 90% of the battle won.

So let’s start with believing that he will do a good job. Beyond that I think even before the budget, we should see a statement of intent from them on what they intend to do in the 100-200 days and then hopefully they will deliver a good budget. If that doesn’t happen, then of course there will be disappointment.

Plus there is some amount of a cyclical recovery which will also start to take hold and against that backdrop even if you can some of the rights steps, it should show results. It’s like when (Reserve Bank of India governor) Raghuram Rajan came in—global conditions turned for the better and some smart steps were taken and we saw the result.

Speaking of Rajan, do you think there will be a difference in priorities between the government and Raghuram Rajan? There has been talk of whether his job will be under threat…

I hope not. That will be disappointing but I don’t think that will happen.

So you do believe there is money still waiting on the sidelines that could push the markets higher?

Of course. There has to be. So far what you are seeing is funds that are already invested, rotating between sectors. But there has to be an addition to the absolute amount invested in the Indian markets and we will start to see that money flow in. If you think about it, last year, which was an average year, we saw more than $20 billion in inflows. This year we have only seen slightly more than $6 billion. If you do the math, currently we are below last year’s monthly average of about $1.5 billion a month. And on top of that this is an important year because of the changes we have seen.

So I have no doubt that fresh money would come in. The large, long-term investors like pension funds would not have come in betting on exit polls etc. For them one or two weeks doesn’t make a difference, so I would think that they would still be committing incremental money to India over the next 9-12 months.

What is your fund’s position? Were you buyers today and what do you like?

We are substantially long. We bought a bit today but for us it’s about rebalancing our positions since we are already invested. We still have large holdings of financials; they make up nearly 50% of the portfolio.

Are you betting on a recovery in public sector banks?

We don’t invest so much in public sector banks although we have some exposure because of the bank Nifty.

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