Shankar Sharma of First Global said that the overall trend in market is still down and the rally from 12,500-15,000 is over and done with. He feels that the sharp oil price correction is likely and India will be a big beneficiary from the same. According to him, India will benefit from fund reallocation in Emerging Markets, or EMs if crude cracks. He feels that the markets may slip to 10,000 levels this year or early next year and may then start moving up gradually over next three years. He sees the Sensex bottom within the 10,000-12,500 range. He believes that the market could double from lows but that may be short-lived.

According to him, valuations of BHEL, L&T is still expensive. He doubts further stellar returns from SBI and feels that the rally is over. RIL may drive the next leg of fall in the market and could test levels substantially below Rs 2,000 per share, he said. He doesn't see much downside for IT from current levels.

Sharma said, "Nothing has really changed. The GDP numbers have come in confirming our fears but this is just a recent set of numbers. We don't know what lies ahead. Overall the trend is down punctuated by the rallies we keep seeing. When I say bull market, I mean taking out the highs and continuing to the path of 25000 and beyond. Markets could reach 18000-19000 - that rally is still to be played out. So, markets can double from lows but that still won't be a bull market. It will coincide with crude having come off, some talk of political certainty because inflation has cooled off. That rally will propel markets close to 20,000 but I doubt if that will be so quick. Crude has to come off substantially at USD 80-85 per barrel. Our case is it will and may take 12 months to get to the USD 50 per barrel levels. Crude may rally 10-20% from its lows. When it hits USD 50 per barrel, you will see India begin to come back on its own."

Excerpts from CNBC-TV18's exclusive interview with Shankar Sharma:

Q:  Are we still in a bear market?

A: I do not think anything has changed and we keep having these occasional rallies. If the market was to go from point A to point Z, it doesn't do that in a straight line; it takes plenty of breaks in the middle. So, we keep taking these breaks every month or month and a half. We rallied from 12,500 to 15,500. Barring a few days, it remained quite shaky and that is a typical characteristic of a bear market rally.

Nothing really has changed. If anything, the overall Gross Domestic Product, or GDP, numbers have come in confirming our fears. This is a very recent set of numbers and we don't know what lies ahead. So, overall, the trend is still down, punctuated occasionally by the kind of rallies that we keep seeing.

Q: Do you think that leg of the bear market rally is over?

A: That is pretty much over and done with. It was unlikely that it would sustain more than 15,500, even 16,000 on a good day. It could have spiked up there and it went close to that. But beyond that, it didn't have the legs. Despite all the positives, such as the government not collapsing, etc., the market didn't even sustain that spike on the very next day of the trust vote. That was telling you that, intrinsically, it was not a strong rally. But beaten down sectors like banks and capital goods rallied and whoever could catch that made some money.

Q: What is your take on the interest rate situation right now? There has been some ostensible relief on inflation, but do you think it's premature to start celebrating?

A: We are becoming like the US, too centered on each data point. I have been following the US markets for more than eight years and every week I find so much excitement over a set of numbers. There is a brief spike if inflation is better than expected or unemployment rate or pay roll or index of manufacturing. There are millions of data points. You can't keep reacting to all that and hope to make money. Inflation numbers came in lower than the market was expecting, but I don't think it collapses to a level where you get a big bull market.

You have reached a point where inflation may have peaked. And then we are quibbling about a percent here or there. It's bad enough now, it may go to 14%, but incrementally that is not really bad news. At the same time next year, we are going to be in a comfortable territory.

Q: What about interest rates then?

A: We are definitely on hold or the trend might be marginally up, but it is definitely not down, and it won't be down for the next year or so. Maybe it won't even be down for beyond that because it all depends on what the philosophy of the new Governor is. These things are very philosophy driven and YV Reddy's philosophy has been more like the European Central Bank, or ECB, rather than the US Fed. It is more about price stability than growth. But let us see who comes in. Unless the gentleman currently occupying the seat gets an extension, by and large it will be driven by politics. Politics will remain cautious. Let us see what happens in the next elections. But that is still a long way away. Nine months in a bear market is quite taxing.

Q: What are the chances that this bear market gets over in the seven months or is there a lot of time to go?

A: That is the whole point. Five years of bull markets got over very quickly, but a year of bear market is just so hard to get through. We are just seven months old in this bear market and it will not get over as quickly as we might want it to.

The commodity cycle is almost over. Oil will see levels that we again cannot forecast. It will may touch USD 50 per barrel levels and because it is a bubble, when bubbles puncture, it could go a long way below that as well. Who will be the beneficiary of that? We all know it's India.

But beyond that, in a global Emerging Market situation, the losers will be Brazil and Russia. Now, within the EM pack, that money will get reallocated elsewhere. So, somebody has to gain at somebody's loss. There is no market of that size which is out to gain the point that Brazil and Russia are losing. I think that has got to be India

Q: What about China?

A: China has actually done quite well. The China Mainland Index has been trashed and that is mainly because the bottom 20%, are very trashy companies. China will benefit but China's market is of a very different flavour. India is more of a market that people like to see. It has more of all the qualities.

So, I think India will benefit a lot more than China does. So, if you have to reach 10,000 you may as well do it now, and that is a possibility this year or may be early next year. Then, you have a gradual climb back to 12,000-15,000-18,000, and in three years you go back to the highs that you saw in 2007.

Q: Three years? You think it could take that long?

A: Yes, I think it could take that long because even if you compound 20% from the lows, it will still take you around that time to get to the highs.

Q: What are you taking as the base?

A: Anything between 10,000 and 12,500.

Q: You think that is the bottom?

A: Yes, definitely.

Q: So you don't see a chance of the market reaching 20,000 in 2009 calendar?

A: I would be very surprised but the only possibility that exists is that you flirt with it. When I say bull market I mean you have taken out the highs and you go along the path to 25,000 and beyond that is a bull market. You could reach 18,000-19,000 but that rally is still to be played out. So, the markets can actually double from the lows.

That still will not be a bull market. It will look like one, but it will not be one and that I think will coincide with crude having come off, some talk of political certainty because inflation has cooled off, I think that will be the rally that will propel you close to 20,000, maybe 18,000 maybe 19,000. But I doubt it will be so quick that it will take off the highs and continue on a bull market path. I doubt that happens in 2009

Q: In the last couple of bear markets, we have seen the bottom being formed and a prolonged period of sideways agony, with the market did not go anywhere. You think that is likely this time or we could have a different pattern playing out?

A: The way this bear market has played out so far, at the lows of 12,500 wherever it reached, it was the single worst year of a bear market, since the time the Sensex was computed. That is pretty amazing in my opinion, despite the bubble being more in 2000, that was truly, truly a bubble, India's bull market was not really a bubble this time around by any standard, though in the later stage there will be packets of ridiculous valuations, but that said, by and large, that's it

Q: Barring the odd real estate here and there?

A: Barring the odd real estate, barring the odd financial services companies, etc. I don't think it reached really crazy proportions like the 2000 bull market and yet the market in 2000 didn't fall as much in a single year. Here we have shed a lot of weight already. That tells me maybe the recovery may be quicker than a typical three year grinding bear market. That's the data point I think we should focus on and I think there has been a very fast fall, very quick, which means the recovery might be as quick as that.

Q: What's the key risk to your assessment, that maybe by the end of this year we see the worst and then maybe a constructive phase starts? Is it crude or is there something else that could go wrong?

A: I just think that overall, the numbers from India, everybody expects the 7-7.5% I think we'll get there, I doubt we will slow much more, I still think that intrinsically we are in good shape. The problems have been deficits etc, and I think if you base your thesis on the fact that crude comes off, and again, you have to take a stance when investing, you have to take a view that if this happens, definitely the other thing will happen. I think crude has to come off substantially. So if it goes to USD 80-85. I doubt the bull markets will come back because that's where it was late last year. For a bull market to come back, crude has to really collapse. Our case is that it will. Now it might take 12 months to get to the USD 50 level, it will not happen tomorrow because like equity markets, crude bulls are also there. So they will say the world is running short of oil etc. You will see crude rallying 10-20% from the lows. So I think that phase is 12 months away, when crude hits the lows it ought to hit. That's when you will see India begin to come back into its own.

Crude at USD 145 per barrel sold off to USD 110 per barrel but India has not done a whole lot. Now that's again telling you something, that India would go to 18,000, if crude goes to USD 110 but that has not happened. There is a deeper problem than just a crude problem. But to cure that deeper problem of deficits, of interest rates, the crude number will be really relevant. But it has to really crack to USD 30-40-50 and there is one more thing - interest rates have shot up 10% or so in the last three-four years. Everything else being equal, your multiples have to contract to reflect that. So if you were saying the market was cheap at 15-16 times, now pound for pound, it has to go to 10-11 times for it to be really truly cheap as rates have really gone up. So that is the other conundrum facing us, that if the rates remain here, then markets have to correct substantially for them to remain cheap.

Q: Do you think the GDP slowdown, the growth slowdown that you are talking about will it get over in two-three quarters from now? Has the market priced it in already or do you think it could spill over in 2009 and curb the recovery you are talking about in the market next year?

A: That is highly possible. I do not think the slowdown numbers have actually come through on the corporate side so while GDP numbers are slowing down; corporate numbers are showing no signs of slowing down. It is not possible to assume that corporate numbers will not slow down. I think people are still in denial, corporate India is still in denial. I do not blame them; I think anybody would be in denial if you have gone through five great years and then face this situation. I think the real numbers will now begin to creep out, which is where the lows of the market will be formed. But I don't think numbers are going to be disastrous. I do not think they will be that bad. That said markets could shed 20-25% from here. I don't think we'll shed a lot more than that.

Q: When you say numbers will be disastrous, do you still mean double digits? Do you think we will get away with 12-13% or 11-12% kind of growth?

A: Again, we are not fans of aggregate earnings, because ultimately you have to go out and pick 25 stocks, because you are not buying the ATF or the Sensex. The numbers from the good guys will be okay and the numbers from the bad guys will be terrible. The market has sifted through that and figured out.

The problem is the good guys are still very expensive. The Larson and Toubro and the BHEL's are still very expensive. I cannot understand where the valuation headroom is for an L&T. It needs to correct 20-25% for a certain amount of headroom.

Q: What about Reliance or State Bank of India, other heavyweights which could turn the index?

A: State Bank is again a proxy for the interest rate situation. I doubt that will give you stellar returns from hereon. It had a good rally. That is over and done with. In fact, the single biggest risk to the market right now is Reliance. It is the classical over owned article of faith stock. It has done terrifically well for everybody. The last leg of this fall will be driven by Reliance and not by the other guys because they have already fallen a lot. So, the last man left standing, at least relatively speaking, has been Reliance.

Q: You think it's conceivable that it goes to Rs 1,500-1,600?

A: I think it can flirt with levels that are substantially below 2,000, maybe 1,500-1700, that will be the real thing. Reliance will now be the only stock and that is the only place that people will lose substantial money. In all the other places, we have already lost a lot of money.

Q: It has been looking nervous in the last few days?

A: That is the danger to the market. When Reliance falls 25%, that drags the market down by virtue of it's own weight. And everything else drops in synchrony. The last leg will be a Reliance driven fall.

Q: How much of that can IT as a sector offset because together it can balance off Reliance?

A: Actually, that is what scares me. I doubt IT is going to fall or pharma is going to fall. If markets are going to flirt with levels that are 25% lower, that means a few other heavyweights have to fall 30-40% to balance out the other guys which don't fall. I don't think IT has much downside; absolute or relative, looking at the rupee and the rupee is headed lower.

So, something else has to give way quite substantially and I cannot find other stocks where people can lose a lot of money. Reliance appears to be that spot. We might be wrong and that's fine. It could be L&T that leads the downside. But the last leg is usually a narrow leg in which just a few stocks fall. I can only point to a Reliance, which has not done at all badly in this entire region.

Q: But you are fairly sanguine that there is one last leg down which is left before this market bottoms out?

A: Yes, I am fairly sure. It would be great for the market for it to happen. If we have a big fall, which is a narrow fall, just lead by a few stocks, I think we'll be in very good shape then because it may sound counter-intuitive but I think a fall will make us healthier.

Q: Why do you say it will be narrow? Because midcaps have already got demolished quite a bit?

A: Yes, exactly. There are not a lot of guys out there who can fall. Midcaps are finished. They got over in 2005. They played out their stuff for the next couple of years. They are not coming back in a hurry. Even if the market goes up, the midcaps will be playing catch up a year after the bull market starts. Forget about them, they don't really matter at this stage. Our fear is that, that is an area where people end up losing money.

Q: What do you do now in the market? Do you wait for that fall? Do you start buying small lots and say I will average down? What is a good way to position 7-months into a bear market?

A: If you are buying 500 shares, I don't think there is any great rush. If you are buying a couple of billion dollars of stock, you definitely should be out there. Put in small bits of money over a period of time. If you are a Government of Singapore, or Fidelity, I doubt you could put in a couple of billion dollars at 10,000-11,000. I think you should start looking at that and I think people are. But the problem in India is that we are still not in a situation where people are feeling confident. That is a bigger problem in emerging markets.

Money has been going away from emerging markets to the US. And the dollar has not been helping at all. So, all said and done, a bit of confidence coming in from stabilization of the rupee or inflation or crude will bolster sentiment. Right now, we are not in a zone where people can put in USD 2 billion to work immediately.

Q: Forget the USD 2 billion category. What about the guy who is neither 500 nor USD 2 billion? A few thousand shares, typical HNI, What should he be doing right now?

A: He should be just sitting at home and doing nothing.

Q: Not buy anything?

A: No. I mean you can. That is an extreme statement. You have to buy something to balance your portfolio if you are in equity. But 30% weight in equity is all I would recommend at this stage.

Q:  What is your best guess as to the leader of the next bull market whenever it starts? Because horses change in every bull market, what's your favourite horse if you were to pick one?

A: We are still thinking it through. Just yet, we are still sifting through the debris. Let's get that out first.

Q: Is it likely that the leaders of the last bull market that ended in January could come back?

A: Pharma has already come back. A number of those stocks are at their highs. That is already back. But it's early days yet. We are still sifting through the debris.