Global focus on EMs, bond yields to move markets: Shankar Sharma

Sharma doesn’t believe in large IT names, while midcaps are a different kettle of fish.

As the next trend that is waiting to happen, he believes credit-led businesses like NBFCs will do well, but he himself wouldn’t put money into it. “These stocks will run, but problems will come later.”

He is not a big fan of banks. Although banks are addressing their NPA problems, and most likely bring down their debt, but what after that, asks Sharma. “The problem of haemorrhaging money might taper down, but I don’t see growth coming in the lending books [of banks].”

Auto and cement sectors look good he said. Bond yields will go further down, he said.

He believes two things will propel markets going forward. One, a global move towards emerging markets and two, bond yields which he sees as going down. “I am not optimistic about earnings growth coming back to propel growth,” he said.Below is the verbatim transcript of Shankar Sharma's interview to CNBC-TV18's Sonia Shenoy.Q: How festive are you feeling this Diwali?A: Feeling quite festive.Q: About the market?A: Yes, we are in good shape globally for emerging markets (EMs) and within EMs India has been a steady one. It has not been as spectacular as let us say Brazil or Russia but we will take what we are getting.Q: Between last samvat and now the market has risen about 10 percent odd. Between this samvat and next what is the forecast?A: I am optimistic. We might beat the 10 percent of last year.Q: But you are not worried about the kind of Foreign Institutional Investors (FII) selling that you have seen. Over the last four days, of course, barring yesterday last four days we have seen what some Rs 3,000 crore getting pulled out. That doesn't concern you?A: If you start getting into this much of micro, which of course you have to, it is a good headline, but I don't think it determines anything about market outcomes. Since I started in 1994 there have been many days of outflows, many months of outflows. We are still up from where we were 25 years back.Q: The big cue that everyone is watching now is the US election. In your mind is it a non-event for a normal Indian retail investors sitting here?A: It has become a large event this time because of big commonality with Indian politics. So, you have a sort of a left of the centre candidate, we have a very extreme right of the centre candidate which is exactly what we saw 2-2.5 years back. If you look at the utterances of each of the sort of candidates they are very similar to what we have seen in India. It has been almost uncanny how India has lead the discourse of US elections by nearly two years. So, in anything India doesn't lead other than politics this time, so in that sense we have lead America.So, that is why we getting more involved because they are kind of reflective of the kind of politics we have seen in India too. Otherwise many elections have come and gone in the US and I don't think we have ever been that engaged to who wins. My gut feel is that democrats will win but you never know the fact is that Trump is still in the race despite all these problems so which if you can liken into a stock that if despite so much bad news the stocks doesn't fall then maybe something is in there. So, that is my contra trade part of it.Q: So, has our market factored in Trump win?A: I don't think our markets will be bothered much. I don't think it matters. You would tell me if he wins or loses or whoever wins or loses how does it matter really speaking.Q: This is still a market that you buy into irrespective of what happens?A: I would buy into, not blindly, because there are lot of stresses in the large caps, let us be clear about this. So, let us not be too rosy tinted for the large caps and we all know the names where the problems exist. So, you have IT in fair degree of stress, you have pharma in a fair degree of stress. You have even consumer companies, Hindustan Unilever (HUL) and the ITCs undergoing lot of stress. So, I don't think large caps are a good spot to be in barring the odds ones like Maruti Suzuki and Tata Motors and all that. The real action in India is under the surface which is your small cap segment and I have said this many times, the last two years that is the segment where you really want to bet and bet big.Q: But what kind of sectors are you looking right now. I know you have been interested in a lot of beaten down companies that are perhaps going through turmoil of their own, some of the infrastructure sectors, so, don't you think that at a volatile time like this one should stick with the trusted war horses, some of the non-index large cap companies or do you think beaten down is the way to go?A: That is my philosophy, I am not saying it is for everybody and remember for the average retail guy to play that strategy is almost impossible because for that you need to know managements, holding power, you have to have tolerance for lot of stress because it is not easy to buy these and sleep peacefully. So, it is not for everybody, it works for me most of the times and if it doesn't work at least the loss elements since they are so beaten down how much can you lose in them.Q: So, what is Shankar Sharma buying these days?A: I have started nibbling at a few. The problem with all these names is that it is very hard to buy and buy in size. So, if you want to buy Rs 10-50 crore of these kind of companies trading volumes are 2000 shares a day or something. So, you have to be very patient. So, obviously one can't talk about what one is buying because then obviously regulations come into play and stock then goes up or something will happen and you will yourself be unable to buy what you wanted to buy in the first place.Q: You were the first to warn us about the disruptive forces hitting the technology space and the legacy businesses of these companies. Do you think the IT story is over for the time being?A: My view as an Indian is that I hope it never gets over because I have seen these companies - their rise and their emergences almost coincidental with the stock market emergence in India back in the early 90s. They have crafted a whole consumer boom in India. Your mobile phones or cars or eating out, cafes, it has been driven largely by the IT pack. They have thousands and lakhs of employees, they have created a whole consumer society in India. So, it is not just about a few good companies, they have fashioned the modern India in that sense. They have given the youth hope. When that starts to dissipate as it is it is always painful. So, for me as an Indian it is very painful. That said they have good managements, they have smart managements, they will find a way to remain afloat but to expect them to go back to the mid teens kind of number of growth that is being unrealistic.Q: So, you wouldn't touch any of the larger IT names now?A: I would not, the short answer is I would not.Q: Not even midcaps because some midcaps are doing quite well?A: Midcaps are a different kettle of fish. Again the same overall large caps have problems of growth, small caps don't seem to be having that right now which might well be true for IT as well.Q: You made money in the IT boom over the last decade. Since that story is dwindling what do you see as the big story over the next decade?A: I am still thinking about it and it is important to think about it and get it right. So, these things don't happen overnight, there are a lot of thinking that goes behind it. I don't have a view what sector will dominate for the next year or five years. It seems so far that credit led businesses will do well which is your Non-Banking Financial Companies (NBFCs) and all that. But I am not personally a believer in credit businesses.Q: Have you invested in any of the NBFCs?A: No, I will not. Because my belief is that the business models over the long term for most NBFCs are generally broken. There will be exceptions here and there for sure but here in this business the profit is always front ended. The losses is always back ended. So, when you give out a loan it won't turn bad next quarter, it will turn bad after 4-5 years. So, you will enjoy the fruits of that loan for the first three years. So, these stocks will run, they will do very well. Problems will come home to roost much later.Q: The stocks have already rallied quite a bit. So, you think that the investors have missed the bus in that sense?A: They have rallied a lot and in some sense they have missed the bus but the momentum itself will propel them a bit higher but I am not a believer in that business. So, I am not going to be buying it.Q: You made a lot of money in the past in some of the story that have seen a turnaround, so Tata Motors for example you bought it when it was a loss making business and now it turned around quite a bit. Do you see a lot more opportunities in these turnaround stories?A: It is more difficult now you need a good solid bear market for that to happen and I don’t see that happening right now unfortunately. On a macro basis Brazil was one such trade where it was a complete turnaround it is up nearly 100 percent in dollar term this year in a matter of a few months time and I caught that trade and we bought it for clients as well, but on a stock basis I am finding it harder to find but there are still names around, not to say that there are not.Q: What names you are thinking of?A: I can’t, even if I utter a word the whole trade is over.Q: You have not been a big fan of banks, but now they are seeing lot of the stresses in the bank reduced to a certain extent, ICICI Bank for example with the Essar Rosneft deleveraging. Is this a space that you would touch at all PSU or private?A: See there are two problems in banks and people are focusing on the first one which is a reduction in the NPA cycle which may well be true, but what after that, what about the growth, where are they going to go out and make new loans. On the corporate and industrial side this is a dead patient you are talking about. There is no capex cycle at all and you talk to companies all day long who is going to put up huge amount of capex, nobody.The problem of the haemorrhaging of money by way of bad loans may well be tapering down, but I am going to buy something not because you are cutting your losses, I want to buy something because I should see profit. Profit will come from growth but where do you see growth coming in the lending book._PAGEBREAK_Q: What is your basis of this 10 percent growth that you see from now over the next one year in the market, because if there is no leadership from technology, there is no leadership from bank where do you see leadership emerge from?A: I think the leadership will emerge from -- there are two things here, one is the autos look good. They are still very strong and they will keep rallying higher in my view. Second, the 10 percent or more could simply come on account of lower rates and lower bond yields. So, don't forget that markets are a function of growth and the cost of capital. So, you may not have great growth but the cost of capital decline, then the same growth looks more attractive. You are already a 6.7 percent bond yield and in my view they can go a lot lower; that itself will propel your markets higher.In fact, the very fact that the markets are up 10 percent in the last 12 months, without any earnings growth, tells you that there has to be something else driving it and that something else are lower bond yields, which were 8 percent now they are 6.7 percent, they could easily be down another percent or so; that is what is going to drive the market.Q: Sectorally, apart from autos, anything else that catches your eye?A: In largecaps that is what I like. Cements looks good; that been a favourite for a long time. So autos and cement look good, other than that they are very tepid.Q: Wanted your thoughts on this whole emerging market play. This debate about India versus China, most people tell us that China is looking a lot more attractive now. What would your view be?A: I would tend to agree. China has lost a lot in the last 12 months time. I think it has bottomed out. The other thing in China you must remember is that the property market is in a completely stratospheric zone. It is huge; it is almost like what the stock market was 12 months back, it is like a runaway bull market.  Now they will try to cool down the property market; they already are. When they do that, that money will flow into the Chinese stock market because it is ultimately a see-saw between property and stocks. So that will provide a good upward momentum for the Chinese stock market because the property market there has just gone ballistic.Q: So it is not that India share will move to China?A: If we look at the India weighting in the MSCI, India is about 8 percent or so, China is about 25 percent. There is just no comparison. We should not worry about our weighting moving to China and all that, our nearer competitors are more like Brazil and all that. China is like three times our size.Q: Coming back to that argument about the market up move, what do you see as the trend say over the next 3-6 months. Are we staring at some sort of consolidation in the market before an uptrend resumes itself, because we do have many global and local triggers upon us and they are not looking that good at this point?A: They are looking terrible. As I said, the only thing that I believe will propel our markets higher, or may say two things, one is the big global sort of move towards emerging markets (EMs). Remember emerging markets went through a tough time between 2010 and 2015. It was a shunned asset class. When something is that beaten down, it comes back and it has started coming back from this year. This year EMs in dollar terms, if you look at the aggregate, they have done quite well about 30-40 percent up.I think that momentum is enough to propel India as a part of emerging market basket and the second factor will be bond yields. I am not optimistic on earnings growth coming back and driving markets up.Q: How long do you think we will have to wait before we get back to the 10-15 percent earnings growth? A: Everybody pencils in 17-20 percent. Q: That is for FY18. I think a lot of people have even written off FY17. A: That was not in the beginning of the year. Each year everybody starts with 17-18 percent year and by the time the year comes to a close, you are at 0-5 percent. That has been a range for last three years; I don’t think that is going to change. Looking at the IT picture, looking at the pharmaceutical picture, I don’t see how largecaps – because they dominate the earnings pie chart. Smallcaps can do well but they are not going to dominate the earnings pie chart. The pie chart is still large companies. I don’t see where you are going to see double digit growth. Q: Since you believe that largecaps may not offer so much value, let us talk about the mid and smallcaps. Any specific sectors where you are seeing value now?A: A lot of them have depressed earnings so value depends on how you project out their earnings. For a number of sectors in the commodity space, in the chemical space, in the infrastructure space, I think because of depressed earnings, the valuations don’t look cheap. However, if we project it out 12 months or 18 months or 24 months, they will look very cheap. Those are the areas where I am particularly focused on. Those spaces still look terrific. Q: Within infrastructure what are you looking at, like some of the road builders? A: We can’t talk stocks unfortunately but I think infrastructure is a good space, road builders are good too. Q: This is Diwali, you can give us a couple of stock ideas. You have been investing in names like A2Z Infra Engineering, Kiri Industries, you have made money in some of them as well. For the retail investor watching you now, what would your advice be this Diwali? A: I think the advice is very simple, buy these sectors, I can say chemicals still look very good. My view is without going into any particular stock, my view is that it is going to be a pretty long journey for chemicals; I like that and within that there are many good companies and it is not very difficult to find a few names in there and I like infrastructure. In particular infrastructure where you can see balance sheet stress being addressed, there are a few out there. So, these two broad sectors have worked very well in the last couple of years and I think they will continue to work very well in the future too. Q: When you talk about balance sheet stress, are you talking about the ones that are seeing some amount of relief like sort of the Jaypee’s of the world, the IVRCLs?A: They are not on my buy list. I think their stresses are a little bit more deeper than what I am prepared to stomach. There are ones with a lot of less stress and I think those names are out there. Q: You spoke about commodities as well, within commodities, what are you looking at?A: Steel looks good, I like steel. I think overall commodities look good, so, chemicals also in that sense is a commodity. I think the whole cycle for all these sectors, bottomed out in the last few months time. I think they are all looking good. Q: What would your advice be to retail investors out there because there are some thoughts that post the US elections whichever way it heads, there could be a big bear market coming globally which could take our markets down as well. You don’t believe that theory?A: Maybe it does but what I am saying is that stocks and the sectors that I am focused on are not very sensitive to those kind of news flows. I have seen a lot of turmoil in the last six to eight months but some of these names, they don’t suffer much even in downturns. So that is my exact point that these companies are not going to be dancing to the tunes of global macro or US elections or US Fed, they are dancing to the tunes of their own individual industries. I think you are better off focusing on those because the globe doesn’t looked settled, nothing looks settled in the world. Q: India will outperform most of the developed markets? A: Yes, for sure.