Banks are over-owned sector and is set to underperform this year, Shankar Sharma, Vice-chairman and Joint Managing Director of First Global Securities said, advising investors to steer clear of the sector. He added that many accounts will likely become non-performing assets in 2017 which will put pressure on banks.
Sharing his outlook for 2017, Shankar Sharma, Vice-chairman and Joint Managing Director of First Global Securities, said that outperformance of midcaps will continue through the year. He, however, voiced concerns that India will underperform in comparison to emerging markets if headline indices are taken into consideration.
Sharma said that commodity-exposed stocks look good and will play out in 2017. He, however, was critical of banking sector. Banks are over-owned sector and is set to underperform this year, he said, advising investors to steer clear of the sector. He added that many accounts will likely become non-performing assets in 2017 which will put pressure on banks.
With the partial lifting of 50-day curbs introduced during demonetisation, it will be crucial to see data in the next 1-2 months to assess the impact of the currency drain-out exercise, he said, adding that the larger companies are likely to be affected more than the smaller ones.
Below is the transcript of Shankar Sharma’s interview to Sonia Shenoy and Anuj Singhal on CNBC-TV18.
Anuj: What about markets? 216 was an interesting year. Index did not do much, but as we all know, a lot of wealth was made in midcaps and smallcaps. As we start 2017, do you think Indian market remains a bottom-up stock picker’s delight, but at index level, not doing much?
A: That has been the theme for the last two years, actually two and a half years now, wherein the top-down model has broadly not worked, but the bottom-up one has been an absolute delight to invest in and to watch. A huge diversion in performance between the large and small, microcap stocks. I do not know what the microcap or the smallcap index did in 2016, do you have the data for that?
Anuj: It was up about 9 percent.
A: Wow. This 2016, it was actually the reverse, it was that the largecaps were down and smallcaps, midcaps was up. It was a diametrically opposite performance. So, that kind of thing is telling you only one thing that India is not a macro trade, not a macro top-down bet. It has not been so even prior to the demonetisation issue. Post that, I would still continue to believe that India is not a top-down bet, it is very much a bottom-up bet and as the index movements today on the first trading day of the year, the new year has told you adequately, for the most part of the day, so far, the frontline indices were in the red, while the smallcap index or the midcap index was in the green. That will pretty much continue for the rest of the year too.
Sonia: We have seen a big degree of underperformance of the Indian market versus global markets in 2016. Do you think that trend will continue in 2017 or do you see any kind of reversal there?
A: That trend has probably just begun. India, traditionally has been a great outperformer versus practically all emerging markets (EM). Throughout the troubled years, post the commodity debacle that started in 2010-2011 and for the next 4-5 years, India has generally been a steady performer, has held its own despite overall emerging markets being very negative. That trend or that trade has reversed this year. So, wherein you have seen the commodity centric market having done very well and India was kind of just tepid or treading waters prior to November and from November- December, it has been a very sharp trend of underperformance for India versus EMs and for India versus global equities. That trend has probably just started now. And remember, that trend is reflective of 30 or 50 stocks. I do not think the trend is reflected across the entire basket of 500 odd stocks in the market. But if you just look at headline indices, India will underperform.
Anuj: We were talking to the management of Bajaj Auto and Hero Motocorp as well earlier and they seem to indicate that the pain of demonetisation is actually more than what we would have initially thought. And even December numbers, they say are clearly pointing to that. Two-wheeler space or four-wheeler space, would you take any bets here or would you avoid this sector completely?
A: At some point, they will become very good buys for sure. My concern here is, not even my concern, that is my reading, is that there has been a big shock in the system right here only. The data coming out of this shock is not going to be easily understood immediately. We are still just a couple of months into this massive decision. The data points will now begin to emerge and the last quarter numbers for last year will begin to come out. That is the time when the markets will really start to hurt, because so far there is still hope. And in some cases, you might have even seen that it is okay, it is not that bad. So, the market is a little confused or not clear about what and how deep the impact of demonetisation is.
The numbers will begin to show you that in the next one month or so. And that is not going to be very charitable towards a lot of companies. Two-wheelers have clearly come out and said it, and two-wheelers are an easy sector to get real-time data on because they are reported almost in real time. But for many sectors, it is not that transparent to understand prior to their numbers, how badly they have been hit. So, the markets are on a little bit of a pause mode, prior to the numbers coming out and I do not think the numbers will really justify the market levels where they are right now.
Sonia: So, what should the asset allocation strategy be for a long-term investor because now, in the market also, it is hard to find outperformance, consumption is not doing well. Banks are under pressure. Other asset classes are down in the dumps whether it is real estate gold, fixed deposit rates are unattractive. What do you do with your money in this year?
A: And you cannot even keep it under the mattress anymore right? The tax guys will come looking for it.
Sonia: That is true. Where do you hide?
A: That is a good question. I do not have an answer for that because I am really scratching my head and trying to figure out which sector, which asset class does well. Clearly, commodities look good. They have looked good right from February lows. That theme is still set to play out in 2017. Within equities, smallcaps are still extremely good. Of course, I have always said this. There is still a very volatile space and 20-30 percent is par for the course. But like I said, this year itself is off to a start which is telling you that this space still looks good. But it is a very difficult environment for big to-p-down bets because there are no huge money making areas that I can see right now. If you were to deploy USD 5 billion. That is a problem. If you are deploying a smaller number, you will find many places to park them in.
The other worry I have and that is something I have not been able to think through is that yields are down from nearly 8 percent to well below 7 percent. Ordinarily, one would have imagined that the markets would have been a lot stronger than what they have been. And this I am talking even prior to demonetisation. Even prior to that, yields had been trending down as we all know. They were just a shade below 7 percent which is a big fall. It is a 10-15 percent fall from the 8 percent. Despite that, the markets were not reacting and that has been a spot of worry for me that one would imagine that with bond yields falling, equities automatically start looking better. But they have not been doing better which tells me that maybe we are not still understanding the magnitude of the slowdown in the real economy which is why this divergence in performance between bond yields and the equity markets has happened. Otherwise, I would have imagined the markets would have been very strong. But they have not been. And this I am saying even prior to November 8.
Anuj: Any theme to back this year? I remember, last year, one of your themes was speciality chemicals, stocks like Kiri Dyes which had a big rally. Any other theme that you think can be backed right now?
A: The chemical sector did not rally just last year, it had bottomed out in 2013 which was when the China environmental clamp down started. So, in those, a single company, it was largely an accepted bet that I saw and many stocks in that space have done very well, extremely well. I think the trade still continues because it is an exporting sector. It is fairly competitive compared to China and in China because of the higher, in fact, they just passed some more regulations tightening the environmental regulations even more recently which all augurs well for that sector. So, that continues to be sectoral. I have said for the last couple of years that companies which have got broken balance sheets but are in some form to repair them are good places to bet on because out of the whole morass of non-performing assets (NPA), there have been good opportunities. So, as long as you pick them, pick them wisely, you will do okay. But to say that there is a big huge bet that one can take for 2017 blindly, as one could have taken in 2015 or 2016, I am still looking for it, still early days but we will talk. We will be in touch.
Sonia: Just to get a slightly longer term, maybe a 6-12 month view out from you, are these telltale signs of a maybe a medium-term bear market that we are heading into, failed rallies, ugly charts, bull in hiding, no good news. Are we looking at a bigger price correction than one would have feared earlier?
A: If you look at banks, that has been the sector which has been over-owned by everybody and clearly, the gains because of demonetisation is not good for the banks, even though some people read something good in them in the first few days of them announcement. I do not know why they did it, but they had a bit of a rally. But my view is banks are the place where you are poised to probably underperform and in fact, lose in absolute terms in this year. It is an over-owned sector and clearly, the data on the macroeconomics front is not good. Because of demonetisation, I suspect a lot of accounts, will at the border turn into the NPA territory or at least in some degree of stress, all that is not good news and the other thing of course is that if you have a big slew of money into the system with more takers for that money, your margins get compressed which is why banks are falling today.
So, all things considered, that is the one place I would definitely not be in, if I were running large amounts of India-centric money as many people are many people have been up to the hilt in banks. So, those are classic over-owned sector with a negative situation on the fundamental side. Banks are going to be a tough place to be in.
Anuj: You have been of course, a critique of RBI policy of keeping interest rates high. Now for whatever reason, we have seen rates come down in system and obviously transmission as well. And offlate, transmission has been ahead of RBI policy as well. Do you think that changes things a bit, maybe with a bit of a lag for the Indian economy and for stock market?
A: Yes, they ought to, logically speaking. This is exactly what I was saying that ordinarily one would have expected markets to be a lot higher than what they are now because of the sharp fall in bond yields, for the last six months or so, but they have not. My sense is an interest rate cut is a good tool, it is still a blunt tool. You need a lot more than just rate cuts, in an economy like India to propel demand. I do not think that the government now, because of this move, has enough bullets to really re-inflate the economy. That is my real fear here that you will see a slowdown on collections of taxes. So, which otherwise, the government might have been able to spend something and spend its way out of trouble. But in light of this, I find their ability re-inflate the economy is fairly limited. So, a mere interest rate cut is not going to be enough for us to come out of this present slowdown drought that we are in.
Sonia: Before, we let you go, currently, as we speak, there is Prime Minister Modi’s rally in Lucknow. We are waiting to hear if there are any comments from that, but what have you made from the recent statements that we have heard from the government, the rhetoric as we head into the Budget? Positive, negative, how are you feeling about it?
A: Which rhetoric are you talking about? I hear it everyday.
Sonia: Of course, what Prime Minister Modi said on December 31 as well. Those were comments. Some positive statements with respect to the housing sector, etc. We have not heard from the Lucknow rally just yet, but overall, how are you feeling?
A: The government is in election mode because there are a lot of elections lined up. So, almost everything this government is doing is towards elections, not really about a real hard look at what this economy needs. So, these are palliative measures. I do not think there is much in terms of where we are right now. These are just soothing statements. I do not think they will really matter much in deciding where the markets go or where the economy goes to be honest.