India in a bear market; time to protect capital: Enam's Sivaram

Quality of earnings reported clearly indicates that India is in a bear market, says Sridhar Sivaram, Investment Director at Enam Holdings.

"To my mind this is not a bull market by any stretch of imagination because there cannot be a bull market without earnings growth, and that is not there right now," Sivaram says.

He says it is time to protect capital, not even to bottom-fish, as domestic earnings are not improving while there are strong global headwinds.

He does not expect the upcoming Budget to have any great positive surprises but fears the introduction of long term capital gains laws in some form. "The Budget may not be that great. But, my fear is there are hints that long term capital gains may come back in some form. That would be disastrous for the market,"he says. He believes if long term capital gains is indeed introduced this year then it would be an absolutely inopportune time and market could even tank further 10 percent as domestic investors would shy away.  Below is the transcript of Sridhar Sivaram’s interview with CNBC-TV18's Latha Venkatesh and Anuj Singhal.Anuj: What do you make of this? First of all is this a bit of a near term bear market and how would we get out of this?A: This is a bear market. First of all, all the bulls who argue that this is a correction in a bull market I have never seen a bull market which doesn't combine itself with earnings growth. I am yet to see earnings growth in the last 18 months and every time we talk about earnings growth the whole hope of earnings growth is pushed to the next 18 months.So, if this is a bull market then this is the first in my history of 20 years that I have seen where we have a bull market without earnings growth. So, I don't think this is bull market without any stretch of imagination. We did get a cyclical pop because of elections in 2014 and lot of the hopes have faded over the last 6-12 months where earnings have continuously disappointed. So, I would say that we are clearly in a bear market.The asset class itself is facing a bear market. So, let us look at the emerging markets, they are going through a bear market. India was sort of insulated from that for the last 12-18 months but if we are having a bear market in the asset class it is very difficult to see that one of the sub components will have a bull market independent of what is happening to the asset class and around it. This is a bear market whichever way you want to talk about it, it is fine.Latha: Your unambiguous comment is therefore that this is a bear market. We mistook it to be a bull market, we misread the growth signals?A: Yes, exactly. If for whatever reason we were hoping that because of a new government, falling commodity prices India will benefit, yes. India has benefitted, India has been one of the best performing markets within emerging markets but we haven\\'t seen the follow through which is the earnings growth and there are combinations of factors because of which earnings growth hasn't followed through in the last 18 months and now we are seeing the correction, so it is a bit delayed. But this correction was overdue because we were basically a hope trade which was continuing to the last 18 months and now the fact that even globally the headwinds are against risk appetite right now. Emerging markets as an asset class is getting questioned and India is the last overweight within emerging markets. We haven't seen any selling at all. So, if this happens we will see some bit of selling coming from emerging market funds who have heavily over-weighted India and some bit of rebalancing will happen and we will have to face the brunt, specially like what we are seeing in financials. Financials is the largest overweight within the overweight India and we are seeing huge selling in that.Anuj: What has changed in one and half year? We had all time highs in January last year. For the Bank Nifty also we had all time highs of somewhere around January to March. And from that point it has been one way slide. We haven't even seen one or two attempts of decent rally. Even the rallies have lasted 5-6 percent, that is it?A: This has been a period which has coincided with bear market for emerging markets. So, let us not forget what has happened to, say the large markets like Brazil, Russia. The currency that has devalued in all these markets we have sort of been insulated. So, during this period of carnage, lot of money has flown into India because India was seen as a safe haven. India was a beneficiary of lower commodity prices but these are good theoretically up to one point of time. After say, 12-18 months people start looking at earnings growth.Let us face it. The earnings growth that we are seeing for this quarter, the earnings growth that we have seen in the previous quarter and even what is expected of the next few quarters they are not looking that great. So, some sort of reality check, I would say, that hey, this is not really working out to the plans and maybe some of the Foreign Institutional Investors (FII) are now redeeming, we are already seeing that negative FII flows over the last 3-4 months, that may continue. India is at risk because as I said earlier India is the largest.As per the Citi Group study India is overweight, average overweight is more than 750 bps. India's weight is only seven percent which means funds are more than 14.5 percent in the global emerging markets. That is a significantly large overweight to have in a single country. I haven't seen such large overweight in India for a very long time. So, this is a consensus trade, there is a huge risk that this may unwind if we don't have improved economics and financials combined together.Latha: What are your bets in terms of growth. You have seen a better part of the earnings in the third quarter. Are the proverbial green shoots there for instance in Britannia, in Marico. We saw in some of the consumer durable companies as well?A: Yes, there are green shoots and there have been green shoots in the last six months. They haven't followed through in terms of being an actual growth. The green shoots continue to be green shoots for the last 12 months. So, we are seeing some green shoots even now. The biggest disappointment is consumption in general. If you look at the aggregate basket, not just one company or two companies, if you look at the volume growth for the Fast Moving Consumer Goods (FMCG) companies on an aggregate or you look at say, even consumer durables those are quite disappointing. I am not even talking about financials where we have seen huge disappointment. So, large part of the market is facing huge headwinds. Commodities I don't need to say, it is well documented. IT is facing huge challenges because it is external oriented. Pharmaceuticals which is the other one which is facing its own challenges because of Food and Drug Administration (FDA) issues. So, the hiding places are reducing by the day. So, the number of sectors that you can hide has substantially come down. These are typical signs of bear market where you are finding headwinds in most sectors. In a bull market there is earnings growth in every sector and you can then argue what is the right Price-to-Earnings Ratio (PE) because you tend to pay a higher PE during bull markets. Here we are paying PE without growth. That is difficult to digest. This has never happened before and these sort of corrections will happen.Anuj: You have said it is a bear market. The problem is that normally in bear markets you hide in pharma, you hide in IT, this time even that has not worked?A: The places for hiding this time have been far and few. I think is more stock specific this time. So, this reminds me of my early days in the market 1994-1999 where we had a bear market for almost five years. The best of earnings never used to give any returns in the market. This reminds me more of that phase where the economy is going through a sluggish phase, globally also nothing much was happening, there were more headwinds than tailwinds. There were stock specific returns which you were getting. It was more a stock pickers market but it was a very difficult market. The best of stock pickers have struggled during that period. We are very similar to that phase where we have that good phase in 2014 and some part in 2015 also. However all of them came with very poor earnings growth, mostly it was PE rerating which happened. Now a lot of that will unwind as we go forward and stocks which have strong earnings growth may continue to trade at a premium which is what will happen.So, this won't be a sector hiding place, it will be more like a stock hiding place where you try to protect capital. Latha: What kind of average losses do you still expect in the market?A: It is very tough to predict where the market goes. I would say this is time to protect capital. I won't even say this is time to bottom fish, I would say you should trade very carefully in this market, global headwinds are very strong.We have to wait for the Budget, my fear is that this Budget may not be that great. There is already some sort of hint that some long term capital gains may come back in some form, those are really disastrous for the market. If we see any such disasters this market could go easily down another 10 percent, currency could depreciate.I think these are times to be very cautious on the market. If you want to bottom fish then you be very sure that you know the numbers. So, I am still very cautious.I was cautious even last April but I was saying that the earnings numbers are not coming and the markets were moving and I was wrong because the markets continued to move up. However the earnings never came and now it is correcting.Markets are slaves of earnings, if earnings come back this market will start to move up again.For the moment you protect capital, you can figure out wherever you want to go, I am not an asset allocation expert but equity looks like a very difficult place right now.Anuj: How high is the risk of this long term capital gains coming back? Theoretically how negative would it be for market?A: The Prime Minister has spoken about this, so this is not some information that I am giving from thin air.I have had some interactions with some bureaucrats in the government, it seems most of them are saying that this in a discussion paper right now but I don\\'t think the Prime Minister will speak about something if it is just a discussion paper.So, in some form or the other there is some contemplation of long term capital gains coming back. If this comes back this is a serious threat to the Indian market because this affects the domestic investor directly. Most of the foreign investors, at least 60 percent of the foreign investors come through a tax treaty either through Mauritius or Singapore, they may not get affected, this will affect the domestic investors.We have just recently seen domestic investors coming back to the market. I think this will completely stop the domestic investor coming back to the market.The other thing as I said FIIs are large overweight in India, not all of them come through Mauritius. So, we will see some bit of selling coming from there. I can easily see a 10 percent correction in the market if long term capital gains is introduced in this Budget. If at all they had to introduce this, this is really a wrong time to do it. This is not a conducive market either globally or within India to introduce something.The point that some of these bureaucrats miss is that today the government collects Rs 6000 crore in securities transaction tax (STT). Somehow this slips their mind. So, when the Prime Minister talks about capital gains is free and one percent rich population is benefitting from this but Rs 6000 crore collection from STT this was in lieu of long term capital gains.So, I don't think the thinking of the bureaucrats as far as the long term capital gains is correct or they have not given all the data to the Prime Minister.It will be very unfortunate if we get this in such a bad market. What are they going to collect out of this? Maybe Rs 2000-3000 crore extra. It is really a rounding off error for the collateral damage that this will have for the stock market, for the currency, for the fiscal deficit, for the current account deficit, I think this is really a very bad idea.(Interview transcribed by Binu Panicker and Swapnil Deshpande)