Shankar Sharma, chief global trading strategist, First Global spoke to CNBC-TV18’s Udayan Mukherjee about emerging markets and whether 2014 will continue to remain a rocky year for these countries.
According to Sharma, if there were EM carnage this year, India will fall but not as much as it has fixed its current account deficit incrementally. “USD 9-10 billion trade deficit is approximately the invisibles that we get. FDI is still reasonably strong because at Rs 61-62/USD, you made India very competitive economy for foreign investors as compared to China,” he adds.
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Sharma also says if nothing very disturbing happens on the political front, India is good to go. “We will keep getting large dollops of capital on the FDI side as well as on the FII side. The joker in the pack is the politics and that is making me even more uncomfortable so far as India is concerned,” he adds.
Below is the varbatim transcript of Shankar Sharma's interview on CNBC-TV18.
Q: Do you expect this to be a rocky year for emerging markets?
A: Last year was rocky too. We had a down period in EMs around the middle of the year when all currencies were getting hammered and then again they pulled back when Fed decided not to taper in the first round. So overall, it was a strange year last year in which no trade had a shelf life of more than two-three months. It ended up being moderately down for the year as in the emerging markets. This year I don’t think the same is replicable. This year will be an absolute down year.
Last year developed markets were on an absolute tear. So, they were up like 24-25 percent. The performance gap between EMs and DMs was very vast. This year it is very likely that the DMs also, because that has come to a consensus trade now, that you are long DM and short EM. It was exactly the opposite in January-March last year. That trade reversed from March. Now people have gone whole hog the other way that the US can keep rallying, Germany can keep rallying but the EMs won't. I think that is also setting up for a major disappointment and so, this year is going to be very treacherous for global equities.
Q: What makes you skeptical about EMs? Is it the basic underlying growth parameter or do you think that tapering has something to do with it?
A: I don’t think the taper has anything to do with it. What I find befuddling is everybody comes in talks about how India is seriously messed up. You have ex-Goldman Sachs analyst and you have XYZ analyst everybody is saying India has lost it, we missed the boat, I say aren’t you looking around? You are supposed to be global analyst.
Please look around, please look at the quality and the quantity of growth that India's peer group have delivered and the developed markets (DMs) are not even close in terms of the growth number that India delivered.
Most importantly, growth cannot be viewed in isolation just as in equity markets. We can't just look at earnings growth and say that all is well. Look at the balance sheet whether that earnings growth is being funded out of huge debt or whether the company is sustaining, generating enough internal accruals to fund its growth. Those are basic kindergarten level security analysis.
Somehow when it comes to macro economics, we forget all our security analysis principles. We just say India's growth was 8 percent or 9 percent and now it is 5 percent. Policies, politics have all messed it up. First, India is 5 percent today at base of about USD 1.8 trillion. We are adding a USD 100 billion every year in GDP which was one fourth of India's GDP 10 years back and that is how far we have come.
Second, we are growing at this - why decreasing our debt to GDP? It is common sense but nobody will mention it. I don't understand why people ignore it whether it is deliberate or otherwise but how many times have people come and juxtapose growth with debt and the leverage in the economy? Almost none; I am talking economist or analysts. The world has not grown faster than India for one country that's China.
In 2012 we had put out a piece saying that China is - the title of the piece was let us welcome China to the league of most indebted nations. That time the consensus was that China has very low leverage and hence it can keep growing at 8-8.5 percent and that time it was growing at 8.5 percent. We analysed the data and concluded that the national headline number of 38 percent debt to GDP is not correct.
You have to look at the hidden debt in the economy and we put out a number of about 160 percent debt to GDP. Now, the numbers are coming at a 200-220 percent two years later. So, China might have grown 2 percent faster, but has busted its balance sheet. Overall, within the context of a bad situation, world has fallen off a growth cliff on a secular basis. India has at least not busted its balance sheet but nobody gives it credit for that.
The trouble is, it is 5 percent and not 8 or 9 percent; Brazil which was 5 percent, is down to 1 percent, Russia was 4 percent and is now down to 1.5 percent, China was 12-13 percent and is down to 7 percent.
Everybody has collapsed in terms of growth and when you have growth collapses of this kind coupled with increasing leverage and increasing debt - a stock exhibiting this kind of characteristic would be down 50 percent. When you have lowering growth, slowing growth and a high leverage on the balance sheet - infrastructure is exactly the same situation. It is the same thing for countries and that worries me.
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Q: Do you think India will stand out or fair better than other emerging markets or will it fall with the rest of the pack if there is EM carnage this year?
A: We will fall but not as much and that is largely to do with the fact that we have fixed our current account deficit incrementally. We are running at about neutral. USD 9-10 billion trade deficit is approximately the invisibles that we get and services, exports plus, remittances and that is neutral.
FDI is still reasonably strong because at Rs 61-62/USD, you made India very competitive economy for foreign investors to come in as compared to China. Overall, at this exchange rate we are going to be vast recipients of foreign capital. On a status quo basis, if nothing very disturbing happens on the political front, India is good to go.
We will keep getting large dollops of capital on the FDI side as well as on the FII side. The joker in the pack is the politics and that is making me even more uncomfortable so far as India is concerned. Shorn off the politics, India is just heads and shoulders and no contest between India's fundamentals and of any other country in the world but this is a potential fly in the ointment.
Q: You still think we will be down this year?
A: Based on the electoral outcome, we are just going to get carried away without doing enough diligence to invest in a certain trade. We look at the billboards of this IPO, overhyped IPOs never make you money. Overhyped trades in markets never make money, overhyped trades in politics never make money.
Q: Do you think people are vested in this Modi trade already?
A: Vastly over-invested, over leveraged, out on a limb, so far out on a limb that they are unwilling to consider in the face of data that it is time to reel back a bit. If you were to compare it to a stock market top, it is an identical situation.
In IT we justified 100 times earnings, in infrastructure we justified that if India has to grow infra has to grow. None of that actually works out. It is identical situation on the politics as well. I have no doubt that we will discover our folly. Unfortunately, if it happens that way, I as an Indian, we will all be vastly poorer if that were to be the outcome.
Q: It is election season now, everybody is entitled to a forecast. You think this may not come to pass – the NDA coming to power as the market expects?
A: The market hopes. I don’t think the market expects. The market has not – I mean who is the market? Most of them are Mumbai centric people. They are not really grass root analysts.
Q: Even FIIs have started talking about this phenomenon and how it can lead India back to higher growth?
A: Now we have to go to a foreigner for him to tell us how many seats the NDA will win. This is how low we have sunk. It is all rubbish. The fact of the matter is that unless that foreigner goes into the villages of Bihar and figures out caste equations and which is the MP candidate from that constituency I don’t think we should – sitting in Hong Kong and Singapore, his opinions are not even worth spending any time over.
The numbers for the NDA will fall well short of a kissing distance of 272. This is the NDA as it stands right now. The third front which contrary to popular opinion is forming, they will coalesce over the next couple of months.
Q: Do you give it some chance?
A: I give it a reasonable chance. I don’t think BSP will be part of that but outside that, you are looking at a reasonable block of 150-200 seats coming out of there.
Q: Do you think that plus the Congress is more likely?
A: I think that is the more likely situation which may not be to the liking of FIIs or whatever it is but that is not relevant.
Q: Are you predicting down market prediction on the political outcome partially as well this year?
A: Definitely, but largely global macro looks terrible. However, within that India would have definitely done a lot better had we had reasonable clarity that the same political formation particularly UPA-II because that was more robust.
UPA-I still had the Left, UPA-II was a lot more robust formation. If that were to continue then the global macro would not have mattered much. You have a bad situation and then you have a messy politics thrown in that and that is not a good cocktail for an up year.
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