market strategy: Don’t buy just because it’s fallen: Samir Arora warns against catching falling knives

“Thing is we are all talking when we talk about these positions for 6, 9, 12 months only, that way we cannot be bearish on US forever because whatever may happen in the end, the valuations of some of these companies are good,” says Samir Arora, Founder, Helios Capital.

Kal toh India mein bach gaye, aaj kya hoga?
Samir Arora: Actually, kya hai ki kal ka bachna was looking a bit odd because you could see the Nasdaq futures down, S&P down, and still we were on our way, so I do not know, but little bit we have to be part of the world, otherwise I think that the US market can fall much more. Now, the question is, I keep saying that I learned from 2008 that we should not forget the world and not only concentrate what is our result and what is our EPS, but we have not reached that stage in the US where we have to connect with them and say we will fall because they are falling, but I think they will fall more.

Parallels have been drawn that okay this is the worst day after March 2020, I mean what happened to US markets last night, parallels have been drawn that if this kind of an unwinding happens we could be staring at 2008, do you think it is that bad?
Samir Arora: So, maybe not 2008 because I do not know but these things are very serious issue and the problem is that at some level you have to agree with what Trump is doing, if you see on Twitter all these old videos of all these Democratic leaders also saying the same things from cost-cutting videos, you can see Obama and Bill Clinton and Al Gore and you can see this tariff hikes, Nancy Pelosi, all these guys actually believe in it or believed in it and it is logical also that if Europe has a tariff on US products and that is okay, then why US having tariff is not okay and also this is a complete change of the idea that get me the lowest cost product, so there is some logic. Now, the problem is short-term versus long-term.

So, if Trump really can ignore the short-term which is say six months by which time the market whatever has to fall would have fallen, then it is not such a bad thing for them and if they believe in it and you can see President Trump’s old videos of 25, 30, I do not know how many years old, he looks very young, but he is talking the same language.

So, it is not a new thing. So, if they believe in it, we have to say that is the path and one philosophy we have is we should not bet on what should happen but what will happen and what will happen is that after making such a drama you do not back off so easily.

So, what are we staring at then, further correction for US equities and if that were to happen, you think India will also collide?
Samir Arora: So, my thinking is that US we cannot say right now but we have to see the response of China and EU and others, mostly these two only, and then because the idea is that if suppose US has said I charge you 20% tax or 30% tax and then the other country says I will charge your products or your services 20% tax, suddenly do you think the next step will be oh, sorry, sorry I did not realise that you can also put it on me let us negotiate and bring it down to 10% or will your idea be I am the buyer, I am buying $20 trillion per year and just like in other countries the biggest buyer government says I want lowest cost, I want open bidding, so whoever is the buyer normally holds the cards. You look at in the olden days when an Indian company would win an order to supply products to Walmart, we used to say sorry we are not interested in you getting this order because mostly you will not be allowed to make money because the size of the buyer is so big. So, it is the same thing. So, it can happen. All I have been saying is right now India will outperform for sure, but it should not stand in the face and have massive outperformance, then more people will feel nervous and maybe more selling will come, just be little bit cautious but let it be as it is, but do not get excited that we are beneficiaries of something, we are not beneficiaries, we are just like every other country because they have scope to cut and say we will. For example, China can say I will put a duty on bulk drugs, they can put pressure, what pressure will we put.

But tell me as an Indian investor what do you do? Do you rush to buy the decline? Should it come or do you wait for the poison to get out of the system?
Samir Arora: Oh, the easier thing is not to buy anything connected to the US which by the way includes pharma also because these things are not over. There are supposed to be sectoral tariffs coming in different sectors. The IT was a good one which I played well. Now, people can say oh, I am reading my book but the point is I said it at the end of Feb also that we do not have and that one is easy. What kind of guidance would you expect.

So, that leaves you with a very few things and there you can be like financials and a little bit of local consumer and this and that, but do not try and buy a stock only because it has corrected a lot, because I was just showing to somebody, he was saying is it time to buy Mag-7, so I said do you know what was the price fall in 22. Okay I will ask you how much do you think Meta fell in 22 or Amazon fell in 22 or Netflix fell in 22 or Spotify, all in the range of 60%.

I knew the answer, you did not let me speak.
Samir Arora: Oh, because I did see you, some images were coming. Point is they fell 60% because some interest rate was hiked by 3-4%, other than Meta which could have had its own issues at that time. So, when stocks fall, they can really fall, not to say oh, this stock is better, that stock is better and I have learned with my favourite story of HDFC Bank falling 52% while its earnings grew 30%.

Every day please see Donald Trump’s press conference for one hour, I think it is very-very interesting, funny, and also you can learn a few things.

But let us look at something which like HDFC Bank or HUL, companies which are completely domestic focus, does not matter. So, do you see disproportionate amount of now premium start moving back into some of these so-called domestic dominated stocks which have got nothing to do with US?
Samir Arora: It has to be a little bit of growth. So, I would not say that for consumer staple guys but there the other only angle was that the FIIs own it and if they sell because the US market is falling a lot, but otherwise domestic oriented with a little bit of growth say 10%, 8% as of now could be also good for parking for some people. We want 10 plus, 12% growth, so I agree with the concept, but I do not agree with one of the two names that you said.

At what point in time, I am just being contra here for the sake of being contra, I mean IT will become valuable right? These companies generate cash, they do a buybacks. I mean it is not end of the world, the tariff aa raha hai, that does not mean that US outsourcing will stop.
Samir Arora: So, thing is we are all talking when we talk about these positions for 6, 9, 12 months only, that way we cannot be bearish on US forever because whatever may happen in the end, the valuations of some of these companies are good.

These guys, as the US as a whole always has the best innovation, best discoveries, new businesses, whatever, whatever, so we are talking only this period that for the next six months A) there is high uncertainty.

For example I bought Alibaba in last year not because I knew what will happen but it was like 6 PE, 5 PE, that is a different game. If you are buying something above average PE, then you want a little bit of visibility. Otherwise, it should become 14 PE, then people will buy it anyway like it used to be maybe in 14-15 era.

There are nobody bothered too much that what is the exact growth, they said apne aap aa jayegi, but right now it is still above pre-COVID levels with below pre-COVID…, not below pre-COVID, with less visibility for at least the large names. When you can say with lower pre-COVID growth rates, you can see it yourself for the larger names.

But when it comes to India that valuation comfort is only in banks.
Samir Arora: No, actually banks there is a little bit of valuation comfort, but also that there can be double-digit growth which you cannot see in the IT guys right now. What do you think can be the guidance for some of these companies in April? I mean, right now they have to guide in the next whatever 10 days. How can they guide?

You can see what is happening in US, which customer is committing to them such a visible this thing. Of course, individually they will. But in aggregate to guide for the whole firm, they will just guide 1-2%. What else can they guide? They cannot even guide 5% according to me.

In the end, whatever may happen, we will learn after three-six months. You call me every month for an interview and sometimes more than once a month and then you want from me to tell you a 10-year view, 5-year view, then you might as well call me once in five years. This is subject to today’s situation, today’s environment.

So, on a 10% decline, what would you say that I would increase that exposure by 30-40%? I am convinced whether it is Trump, whether it is tariff, whether it is China, whether it is something else, I think value usmein hai. What would be that trade apart from banks?
Samir Arora: You can see what is the change in PE for these companies over the last five-seven years and some of them have had very high change. But we also used to buy them because the environment was such that you could still expect to get as we say 12-15% type earnings growth. We are not asking for 20% earnings growth, I do not even call a bull run as 20%, I say double digit is a bull run. But if you can see visibly right now that some of these companies like even the consumer staple type guys will grow 3-4-5%, then what is the need to buy them?

If you see our portfolio domestically, just finished our March month, you can see in April when these portfolios come out, we do not have cash in those funds, we do not have cash here, we are broadly buying something here or there, but I am saying right now, today, yesterday, when the tariff was much bigger than expected, then there is no need to come in on day one and day two, whatever is there is there plus-minus.

I will put some facts on the table here. One fact is that crude prices, whatever Donald Trump is trying to do, he will keep it low. Second, directly-indirectly he wants to keep the dollar low. So, if dollar is low and if crude is low, two bugbears for India, can I say that on the margin gradually, slowly, but these are factors which suddenly will change, suddenly will change your outlook and your earnings.
Samir Arora: So, we are already bullish on India. We are bullish on India A) in relative and in absolute if the world does not collapse. I am only talking about that part.

What I have only learned is if the US falls with dignity, falls 10-12%, we can be flat up as a market as it happened in 2022 also. I am only trying to iron out that situation where the US market falls 20-25%, then this oil fall and all will not matter.

So, when recession type things come, when we all get dragged into being called financial markets, rather than India, US, etc, like it happened in eight, where it did not matter that your market, your bank did not have subprime exposure, that it did not need to raise fresh equity, that the earnings growth was still there without dilution, it did not matter and mostly we fell more.

So, I am only saying for that you need 30 days, 15 days to see counter measures, counter tariff, whatever it is called, reciprocal to reciprocal tariff and all that kind of thing which let us say 10-15-20 days.

Now during this time or in our case for IT exposure, what is the risk that on 20th April, we will say, oh my God, what a miss we made because this guidance was so much better and the stocks went up 8-10%, they go up 3%, who cares? I think that probability is zero.