Fed's stance change to boost flows, smallcaps remain attractive: Shankar Sharma

Going ahead, the Fed's path to easy monetary policy in 2024 will trigger more foreign inflows, Sharma said. "But Indian markets will do well, with or without foreign flows," he added.

Federal Reserve chairman Jerome Powell finally sounded dovish, signaling interest rate cuts next year, but ace investor Shankar Sharma is not surprised. "The United States is a consumer-driven economy and low interest rates are the lubricant to keep the engine going. So, this was bound to happen," Sharma said in a conversation with Moneycontrol.

The Federal Reserve kept its key interest rate unchanged Wednesday for a third straight time, a sign that it is likely done raising rates. The Fed’s policymakers also signaled that they expect to make three quarter-point cuts to their benchmark interest rate next year.

Going ahead, the Fed's path to easy monetary policy in 2024 will trigger more foreign inflows, Sharma said. "But Indian markets will do well, with or without foreign flows," he added.

Also Read: Fed’s dovish pivot sparks early Santa Claus rally; Sensex, Nifty rule record highs

Edited excerpts:

Things are working out exactly how you had predicted. Three rate cuts on cards next year. Fed has changed to a dovish stance. What's your take?
It was bound to happen. I have always maintained that inflation is the least of the problems in civilised countries with reasonable central banks. Inflation for investors is a non-issue because the data itself will scroll down on the back of base effect. The actual prices never fall, it is the rate of change that falls. It is all smoke and mirrors.

That’s why I have always said that inflation is a temporary problem. You have to just ride it out, stay put. Always remember, the US drives on only one thing - low interest rates. Without that lubricant, the engine stops, it is as simple as that. US is a consumer-driven market and consumers require low interest rates.

Also Read: Short Call | Fed rate fodder cheers D-St bulls, PTC India, Religare, UPL, HPL Electric, United Spirits in focus

So what does mean for India? Do you see a reversal of flows right away? Or is there a threshold yield that money will wait for to sort of the for the big transition to happen?

This is very seductive logic that if interest rates come down, then flows will come into emerging markets. I have rarely seen it happen in real life. The reason for that is only a fraction of investible wealth in the US, or for that matter developed markets, is allocated to emerging markets. We might think that $10 billion-$20 billion is a lot, but these economies are $30 trillion - $35 trillion. So, the fund allocated to EMs is actually just a drop in the ocean.

So, FIIs are not making decision based on interest rates. They are making decisions based on what these markets offer. As simple as that. So, flows are bound to come. Except for last two years and 2008, when have FII inflows really stopped for India.

Also Read: Fed’s change in stance will trigger a solid rally in largecaps: Saurabh Mukherjea

But does it set the ground for big flows?
I agree that it will lead to more flows. All I'm saying that it doesn't matter. We have done well with FII buying, we have done well without FII buying. Hopefully, the appetite will increase for riskier asset classes and within those smallcaps, which have already done well without much FII interest.

Since FIIs have significant exposure to largecaps, do you think they largecaps will now swap seats with smallcaps? Will the outperformance reverse?
I don’t think so. Luckily, two years back, I spotted that India is like a collection of countries with different market size potentials in different parts. This means a small company does not have to go pan India to do Rs 500 crore of turnover. It can simply stay in its comfort zone where they understand the market and know the distributors, etc. That is exactly what has played out. Smaller companies, regional players have done phenomenally well. That macro picture doesn't change.

Now with lower interest rates in the US, risk appetite only goes up, which is even more good news for smallcaps.

So, what's your bet for 2024?
I think we are very strongly placed and will do very well in 2024. The smallcap rally has a lot of legs.