In a conversation with Udayan Mukherjee, Shankar Sharma, Global Trading Strategist at First Global affirms Indian equities are in a long-term bear market with cyclical bull rallies thrown in.
Big bear Shankar Sharma discards the theory that India is in structural bull market. Sharma, the Global Trading Strategist at First Global has routinely maintained the bear market that began in 2008 has only now started taking its real shape.
In a conversation with Udayan Mukherjee, Shankar affirms Indian equities are indeed in long-term bear market with cyclical bull rallies thrown in.
Terming the EMs asset class a yesterday story, Sharma says there isn't any real story worth selling.
"The EM story was being sold on commodity bull market and consumption fallout of strong economic growth," he says adding the asset class will fail to provide any succour to investors.
A stark contradiction, however, is India as it continues to be well-placed among global equities.
"The time now, is to stay invested in fixed income assets," he advises, adding that India is behind the interest rate cut curve.
On sectoral picks, he advises staying away from banking stocks because he thinks banking as a space offers more downside than upside at the current moment.
Below is the verbatim transcript of Shankar Sharma’s interview with Udayan Mukherjee on CNBC-TV18.
Q: What is your reaction to the volatility of the last few weeks, do you think the bull market is still alive or has something turned?
A: Right from the beginning of the year one thing was very apparent and I am talking more in context of the US markets that volatility was really low and it was looking as if it was going to make a big sharp up move. I had thought and I had shared this with clients that I thought that January-February was the time when this move that has just now happened would happen. However, the market didn’t do anything at all in January, February, March right up till July- August. They were just in a tight range, they were just grinding, they were neither going up nor coming down.
I thought that the whole move should have happened a lot earlier but I was anticipating the move except that I was wrong in terms of the timing of it. However, it has happened is of very little surprise or no surprise because the internals for the US market had been worsening quite remarkably over the last year, year and a half. I think the data is like some third of the S&P 500 stocks were trading at multiyear or a multi week lows even though the indexes were trending higher. So, those are very classic signs to watch out for when the market starts to get hollowed out.
Also, in fact on a variety of parameters that we track, things were looking a lot worse in the market internals than where they were in the late part of 2007 and the early part of 2008. So, that was a little bit of a scary bit that the internals were looking lot worse than worst bear market that any of us have ever seen in this generation.
The move that happened was not surprising. The other thing is that June 28 or something we had put out a piece of research saying that the emerging market index itself which was about USD 41, I am talking the exchange-traded funds (ETFs), which is comprised of all the emerging markets across the world and that is basically that tracks the MSCI emerging markets (EM), around USD 40-41 we had said that this going to go the way oil had gone and now the index is about USD 31-32. It is down like about 25 percent. So, none of these two moves were of great surprise. We have talked about it and we have written about it as well.
Q: Is it over in your eyes or do you think it could get much worse from here?
A: If you think about it emerging markets (EM) I don’t think are done. I don’t think emerging markets have any real story left in them worth selling. The whole emerging market pack was being sold on the basis of the commodity bull market by and large and the consumption fall out of strong economic growth both those two factors I mean clearly I am sure we can all agree that in none of the emerging markets do you see any semblance of consumer sentiment being on the mend.
India has been an outlier in some senses because India never really ran huge macroeconomic risk in order to grow 7-7.50 percent from 2004 to 2014 so in that sense India will never collapse the way China collapsed. That has been something we have discussed this and we have written about this also back in 2012 itself, that kind of path of growth ultimately ends up in a big implosion. That said India is not going anywhere fast in terms of consumer spending, consumer sentiment etc.
China’s consumer spending and consumer sentiments again are low so the emerging market theme clearly has run out of steam without any doubt. Within that we can argue India looks better which I have no disagreement with at all. Relatively India is always a safe haven market when there is emerging market turmoil and this we have seen from 1997-1998 onwards. So, that is no surprise at all because we have Infosys and Hindustan Unilever of the world which obviously do okay. They don’t fall as much as a bank will fall or a commodity player will fall.
That said, I don’t think EM’s offer any succour - they are a story which is more or less yesterday’s story. If you take EM’s out of the pack Europe is still struggling. US which has been an outlier again in terms of equity returns the fact to the matter is the Standard & Poor's (S&P) 500 was 1,550 or 1,600 if I remember correctly 1999 peak. Today it is 1,900.
16 years hence all you have got is a 20 percent move over 16 years which annualises to a 1 percent or 1.5 percent. So, this whole equity theme that we keep talking about as brokers or asset manager keep pushing unless you have times the market smartly, unless you time them in terms of being selling at the top and buying at the bottom if you just bought an held whether it is the Japanese market or European markets or the US market or even Indian market for that matter we have gone nowhere from 2007 top. We have still not taken out in dollar terms the 2007 highs. We are still very short.
So that only tells me this that no market is good or bad they are all supposed to be traded and don’t you start believing the buy and hold thing. They might work for some periods of time. I don’t disagree. They might work for some stocks but overall looking at the patterns of equity returns, buy and hold has simply not worked.
Q: How are you characterising this, as just a big correction because the market did go up a lot? From 2013, middle of that to 2015 February-March the Nifty went up some or Sensex went up some 80 percent and after that we have run into rough weather. Do you think this is just a cyclical kind of a correction of six to nine months or do you think it is deeper than that given the global problems that you are speaking about?
A: My view on India has been very simply that there has been a stealth bear market in the largecaps for a while now and there has been a stealth bull market overall because of the very strong outperformance in small and midcap stocks. That is historically quite rare to find that you have had big market corrections in this interim period but usually mid and smallcap indexes and stocks have been very resilient. If you look at the data itself, they are outperforming largecaps by factor of 2 if not higher. I have been very clear that that has been the game in terms of last one year.
Largecaps were largely been driven by the banks. I don’t see banks delivering u any great returns from here on. In fact in my view there could be negative surprises more than positive because the banks have still barely managed, not even managed, they are still trying to figure out how they work their way out of the infrastructure mess and now even while that is not sorted out, you have a huge mess which is building up and which is the commodity producers mess. So, your steel companies and companies doing that end of the business are going to be the next big NPA problem for banks.
Bhushan Steel was the tip of the iceberg, there are many more in the pipeline. I don’t see how any of these companies are ever going to be able to meet their obligations given where end product prices are ruling and where end product demand is ruling. So, I don’t see banks being any place where I would be comfortable putting money in which leaves you with the old favourites of the FMCGs and the ITs which are good but they are not stellar. So, India largecaps, it is a flattish market to a down market but small midcaps if you have chosen them right, you are in a good place.
Q: Even after nearly 15 percent correction you are saying that for a medium-term investor equities may fail to beat fixed income returns from here?
A: I would want to buy fixed income now because and I have said that in fact we should be buying fixed income in the last 12 months or so because obviously whether it happens now or it happens six months down the road our rates have to trend lower. I think we are actually way behind the curve already but be that as it may that has to happen. So, fixed income offers you a lot safer return, more predictable return than equities do at this point.
However, my view being as always been in the last 12 months or so that if we go to a bond yield of 4 percent which I think logically we should given where our inflation numbers are that is the sole reason to buy India. There is no other reason to buy India and anybody buying India in last 12 months betting on growth and revival on capex cycle and all that needed to have their head examined.
That is what I call a classical; I mean it is absurd illiterate way of investing when you are betting on an outcome which can only be in a dream global scenario where there is huge tailwind of global growth and everybody is going to be partying hard like we did between in 2004 and 2007. In the absence of any of that to expect India to completely change trajectory and grow 8 or 10 percent is completely absurd. We are growing 7 percent but that data we all know is all rubbish, it is not worth relying upon it at all. So, the fact of the matter is India’s sole reason to buy is the bet that rates come down which I think is the reasonable bet to take.
If that were to happen this market won’t fall as much or might give you moderate returns over fixed income. That is about a best call you can take on India right now. The global situation is terrible and nothing got resolved post 2008 as we all know. We kind of just papered over the problem or put band–aid over them but they have all been festering underneath. They are all coming back to haunt us. In that context to expect that India will yield over 20 percent is in unrealistic.
However, if we can merely tread water for the next few months I think we will have done okay. I do believe India in an outperforming market. It is not an underperforming market and it always has been an outperforming market when you have a global or more particularly an EM crisis out there, and we clearly are in the middle of one right now.
Q: Do you see the global crisis getting worse because the US has corrected a bit, emerging markets (EMs) have corrected more, is it possible that we are staring at some kind of a global equity bear market, is it likely, what kind of probability would you attach to that kind of outcome globally?
A: We have already been in a bear market for years; I am just giving you the data. The euro stocks haven’t taken out multiyear highs, the S&P is barely clearing the level it reached in 1999. Tell me this, India in dollar terms is still below 2007-2008 highs. Nikkei won’t even get there for a long time to come. China got there briefly and you know what has happened ever since. We are already in a global bear market. We can talk cyclical bull market, something corrected 50 percent then it rallied another 50-100 percent so we said this is a bull market. However, that is not a bull market. A stock that goes from Rs 100 to Rs 20 and goes back to Rs 100 is that a bull market? That is not a bull market, that is still in a bear market. Unless it goes beyond Rs 100 and goes to Rs 200 I don’t and frankly nobody in their right senses should be calling that to be a bull market stock.
Global indices have basically started from here, gone down and then gone back up to where they were few years back or barely there, that is not a bull market. Let them clear out those highs and go 40-50 percent higher then we are talking a bull market. So, all I am saying is we are still in the middle of a structural bear market in which we have caught some little bit of cyclical bull market rallies if we were lucky to time the markets. However, we are still in a long-term bear market; that is the reality, that is the data – let anybody argue with me and I am willing to argue this.
Q: There is a lot of talk in India that because of our outperformance and that growth is just about to pickup and it is just a matter of time, maybe in a quarter or so we will see growth picking up, we will see capex spending pick up and we will see earnings growth coming back. Do you disagree with that assessment or hope?
A: I broadly disagree with that. To expect that the capex cycle comes back without any visibility at the end demand, if you are talking somebody to put up a steel plant or cement plant or setup huge infrastructure building capability, you need to see the end demand happen. Nobody is just going to put up capacities just for the heck of it. I don’t see any revival of demand at that end. There will be some marginal change because of government spends but that is fine, we all understand that but is that good enough to drive a large scale revival in the capex cycle? I totally disagree.
In the consumption cycle, urban consumption might be a tad better because of lower inflation again and that is an argument well taken. However, on the other hand the same inflation argument cuts the reverse way in which it ends up killing rural consumption. Rural consumption is gone completely through the floor, that was the sole read why India survived 2008 so well because the government stimulated the rural economy which took up the consumption slack which the urban dewellers had given up.nad hence India kind of came out of 2008 relatively unscathed as compared to any other economy in the world.
Now that rural economy story is gone or at least has moderated significantly, I don’t buy the logic or the argument that there is a huge or even reasonably strong earnings upgrade cycle coming up ahead of us. I don’t see that happening for commodities, I don’t see that happening for consumers I don’t see that happening for autos, IT and the pharmaceuticals are different set of animals so let us not talk about them. So, where is the earnings growth your mythical unicorn like earnings growth that is suppose to come from? If you just disaggregate it, I don’t see that easily visible.
Q: You track autos. You just mentioned them - stocks like Tata Motors have collapsed. But, some stocks like Maruti, etc. have held up. Would you buy anything there?
A: We have liked Maruti for quite a while. I mean ever since the labour unrest problems happened and it had sunk quite significantly, that is the time we thought it was an exceptional opportunity to buy. We have really liked them as a pack, and we have liked Maruti in particular.
Tata Motors is yesterday’s story as far as we are concerned. That was the story we caught at the right time and fortunately, we exited at the right time. And everybody who has seen me knows that I am not a believer in buy and hold. Every stock has a time and Tata Motors’ time came and it has gone. And that is pretty much it.
Q: You say, you do not like banks. Not even the bluechip private sector banks, I mean the HDFC Bank, Axis Bank or even ICICI Bank? You would not touch them now even after a big correction?
A: I would not touch Axis Bank and ICICI Bank. HDFC Bank, if you must have a bank in India, then that is a sole bank you would want to own. But I really do not buy the logic that these guys can stand out any credit problems in the economy. I mean, they have stood them out so far, but I do not think the situation on the credit side is getting any better. In fact, like I said another big credit problem is now coming up which is the commodity sector, apart from the infrastructure sector which we already know of.
I do not see how all banks can dodge all credit bullets continually in the private sector and that I find a little hard to believe.
I also know of the fact that a number of the banks and I will not take names have been very busy evergreening their accounts. So, we know they are giving cheques by one hand and taking cheques on the other hand. A lot of manipulation is also going on. So, it is not absolutely kosher and we think that everybody pure as driven snow. That is not what banking is anywhere in the world and that is not the way Indian banking is either.
So, within the context of the Indian banks --HDFC Bank is a great bank and we have known the management for 30 years now. So, there is no debate, but it is not a call on a particular bank. I am just saying banking as a space to my mind offers more downside than upside at the current moment.
Q: Do you have a view on the rupee because that is another thing which has disappointed a lot of investors particularly global. After the last election results a lot of people were talking about 45 to the dollar and we are staring at 67 to the dollar?
A: I shouldn’t be saying too many things about global investors but having known them long enough, I do know that they are as illiterate as most of us brokers are, they will believe just about anything. So, let’s not talk about them.
My view was that rupee is going to be headed lower and I have said this publically and I have said this in the print media as well. Back last year October, November my printed view was that it was easily a 64-65/USD trade-and when it goes to 64-65/USD, it doesn’t mean it stops there, it can go obviously a tad lower than that and now it has broken through 66-66.5/USD too.
The fact of the matter is that when you have a currency war starting thanks to the Chinese move – if go back in time, the roots of the 1997-98 crisis was really again a weakness in the yuan in the 1994-1996 era. That made the rest of Asia uncomparitive, that made their currencies overvalued and that widened their current account deficits and then suddenly capital fled from Asian shores. It is almost in some senses a repeat of that.
China move is now making other competing economies currencies look overvalued, so they have to devalue or depreciate their currencies, India being one of them. So, it is kind of a spiral that we are again into which is why I am saying it is a very troublesome situation and to wish it away is not sensible.
Rupee has broken out; one does not know where it can go. Fundamentally, it was a tad overvalued; anyway it had room to fall. Looking at the data, what I am most disappointed at is that despite gold imports being down and despite oil being at USD 40-45 per barrel, you are still going to be running a current account deficit of 1.5 percent. That is insane. One should have bet on a current account deficit of maybe 0.5, 0.4, maybe neutral, maybe surplus but we are still where wherever the last 10 year average has been which is nearly 2 percent, this is with oil at USD 40. So, we got a big boon, we are making nothing out of it and the rupee is reflecting that. We should have been at neutral CAD right now but we are not.
Q: So what is your guess, we are at 25000 Sensex right now. If you had to crystal ball gaze six months out, one year out, where are we going to be?
A: Worst case we fall 10 percent from here, I don’t think we have more downside that that. Emerging markets have a 20 percent downside; India is probably a 10 percent downside because India will definitely be more resilient.
I don’t think you should bet on a huge upside for any global market – Indians tend to believe India belongs to some other planet and Indian markets will march to their own tunes and Indian economy will march to a completely different tune and we will grow 10 percent, rest of the world can grow 2 percent or 5 percent it doesn’t matter. Unfortunately that is not reality, we are still an average market, an average country, we are not blessed with some great skill sets as the US or China is. So we must accept those realities. Within that we will still come out okay because national balance sheet has been left in good shape and the current account for whatever it is worth is still 1-1.5 percent we can live with.
So we won’t have a macroeconomic crisis, hence the markets will be resilient on the way down. Let me put it this way because I do believe EMs are headed a lot lower than where they are right now, there will be sharp bear market rallies mind you, so they will keep kidding us that the bear market is dead but I don’t think emerging market are out of the woods at all.
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