SENSEX NIFTY
Apr 06, 2013, 04.16 PM IST | Source: CNBC-TV18

Sensex may sink to 16K as bears step up game: First Global

Not only India but global markets on the whole are wading into a deep and vicious bear market.

Not only India, but global markets as a  whole are wading into a deep and vicious bear market. Given the kind of fall seen in Indian shares in the last few sessions, one should be prepared for something more serious in next few months , cautions Shankar Sharma of First Global. 

“It is going to be a global bear market and not just an emerging bear market because things like Cyprus are no less worse than a Lehman. This bear market is like a wiper snake which causes a very painful death. I don’t think this is a slow death; this is going to be a very prolonged, but extremely painful. It is not going to be easy drifting down kind of bear market,” he said in an interview to CNBC-TV18.

India’s macro economic scenario is unlikely to improve soon and corporate earnings are seen weak this next year. Continuing his bearish tone, he said, the Sensex is likely to crash from the current 18,500 levels all the way down to 15,000-16,000 this year.

Sectorally, Sharma is bearish on the banking stocks and expects autos to see a tough time for the next few months. Meanwhile, bear market defensives like IT, consumer and pharma are relatively safer bets.

While most market experts complain about lack of retail participation impacting the Indian equity market, Sharma feels local investors have made a wise decision by staying away from the market .

“They have not bought into the bullish statements that brokers like us keep churning out periodically. They have bought real estate, they put it into bank deposits, they have bought gold and if the markets are like this I am sure the currency also will take a hit. Overall asset allocation wise the locals have done pretty okay. We really cannot find fault with that,” he elaborated.

Below is the edited transcript of Shankar Sharma’s interview with CNBC-TV18

Q: Does it look like something more ominous than just a routine correction? Could we even be at the early stages of a very bearish kind of patch for the market?

A: Around Budget time, I had held a view that we are at the cusp of a major bear market. Events subsequently have not made me revisit my view at all. From the beginning of the year from early January itself we have cautioned all our clients repeatedly that this year is going to be very different from last year. Last year we were table thumping bulls right from the month of January 2012. But in January this year we reversed our view completely, it has been a complete u-turn.

So far the script is playing out probably even a little worse than what we might have expected. When you have the beginnings of a large bear market, go back to 2008 January, it started out being really ugly and then the whole refrain started to come out that the worst is over, it is a healthy correction and rubbish like that. It never quite happens that way.

When there are significant cuts of the kind of we have witnessed now or in January 2008, one should almost as a rule of thumb take it as something portending even more ominous next few months.

Q: Your views in January were sounding very cautious but not outright bearish. What you are saying right now is that maybe the trend has accentuated on the way down and certain facts have come to the fore which makes you even more convinced that we are entering a bear market. What are these facts or signals that we are picking up?

A: For one, we look very closely, at our hearts we are really tape watchers and when you watch the tape of how India or the emerging market pack has been behaving versus the US that was telling you adequately that there is something wrong in this whole emerging market growth story theme.

Just go back to 2007 it is almost a mirror opposite of what happened in 2007. The US markets peaked in the month of September end or October first week 2007, but emerging markets kept rallying on continually till December, early January for India and as late as April for China and Brazil. That is the kind of twilight zone in which people say okay, the US has got a subprime problem, emerging markets have got great growth still behind them. India was growing at 9 percent or 9.5 percent; China was 13 percent back then.

There was something called a decoupling trade. One must have heard many experts talk about how EMs will decouple. As we now know nothing decouples. Everything is correlated. Everything falls. Some might fall before. Some might fall later. This time it is exactly the opposite. EMs started to correct in January. US market has still not corrected. People are now saying the reverse decoupling theory that the US will carry on, the EMs are anyway a bunch of scam-ridden economies, so who should care too much about them. It never unfortunately works out that way.

The US will also fall. The EMs have already started falling. So when you put that together in the backdrop of very poor economic data from almost all the Brazil, Russia, India and China (BRIC) pack and smaller countries like Philippines, Thailand etc. have had great runs, but that always happens in a pool of 15 markets. You will have the smaller markets doing well, the larger markets underperforming as the case has been of EMs.

Put all that together and also the fact that Europe has not gone away. Japan which was a somnolent market had a vertical rally. Vertical rallies always end badly, so I have no doubt in my mind that Japan will also end very, very badly, because nothing has really changed fundamentally except depreciating Yen. US seems to be holding its head above water. I do not see that sustaining for too long. All of that started from the middle of January. India started to crack from January 24 and the EMs also around that time. Since then it has been an absolute one way street for the markets.

In the pre-Budget show I had said that if at all India has any chance and I am not a big believer in Budgets changing the course of markets, but if there is any chance that we have this is the only chance that we have which is that Mr. Chidambaram gives us something to sort of live on for the next six or eight months time. Unfortunately we did not get any of that.

We got a rude shock in the form of the Tax Residency Certificate (TRC) being no longer just a necessary and sufficient condition. It was changed very certainly to being necessary, but not a sufficient condition for Foreign Institutional Investor (FII) flows.

Despite the headlines in the Budget speech being that we want to attract global flows, we want to be perceived to be an attractive destination through stable taxation policies. Here in the subtext you give investors something which completely removes the Supreme Court ruling on this matter of many years back that the TRC is enough proof for your residency in Mauritius. You completely remove that.

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