January 2016 is 'eerily resembling' January 2008: Shankar Sharma

The state of global stock markets in January 2016 eerily resembles the one witnessed in January 2008 -- when equity markets topped out after a multi-year bull run and began to crash and burn -- believes noted market commentator Shankar Sharma of First Global.In an interview with CNBC-TV18 Consulting Editor Udayan Mukherjee, Sharma, however, made it clear that he is not forecasting a crack of a similar magnitude (in percentage terms) that was witnessed globally during the financial crisis of 2008.

"I am not making a case for a 50 percent fall in market," he told CNBC-TV18's Consulting Editor Udayan Mukherjee. "All I am saying is: directionally, and the speed of [an expected down] move will be very similar to what we saw in 2008."In the interview, Sharma also discussed how he expects Indian equities to fare in such an environment and outlined his view on various sectors.

Below is the transcript of Shankar Sharma’s interview with Udayan Mukherjee on CNBC-TV18. Q: How have you been reading the turn of events, because suddenly, there seems to be complete mayhem in global markets, did you see it coming? A: Even at the risk of sounding immodest, for our clients, particularly their global funds, we got very light on equities right from November onwards. And my view has been that if you are talking in the globe, the US market was heading nowhere, but down. And that had been grinding from January last year. So, if you just simply saw the market action, it was just unable to continue the way it had continued from March 2009 bottom, so it had lost complete momentum. There was no steam left in the market, it was just treading water. So, everything was pointing towards a pretty bad 2015. 2015 turned out to be an average year, tepid, flattish year for most markets. India was down 6-7 percent, most markets were down around that or flattish. But, that did not mean that 2015, what one was seeing in 2015 was over and that 2016 would be a markedly different year. My view was that, I really thought that this crack would happen sometime in 2015 itself. It did, particularly China, but for the global markets to crack, it obviously took a little bit longer because remember, this has been a good market, or sort of a bull market. I do not believe it has been a bull market globally anyway, but most people tend to believe that from 2009, we have had a bull market, but that is still an overall a trading range for global markets, not a secular bull market. But, be that as it may, it took a while for global markets to roll over. And now, January 2016 has eerily started resembling the January of 2008. If you recall, again, the first fortnight of 2008 was really ugly and this is kind of shaping up that way. Q: Are you saying that you are seeing shades of 2008 in how his year has begun? I mean, that was a 50 percent drop in the market. You are not suggesting that it could that ugly this year, are you? A: I am not saying it is going to be exactly in terms of market percentage move like 2008. I am not even for a moment suggesting that, but of course, one market has seen something like that which is China. So, it is not that no market has done bad, but I am not making a case for a 50 percent fall in market. All I am saying is that percentage moves are all debatable, but directionally and the speed of that move will be very similar to what we saw in 2008, because the data out there, the Fed hiking rates, trying to convince itself more than anybody else that things are fine with the US economy, while nobody seems to be convinced that it is indeed the case.  In my view, China can still fall a lot more than what it has already done, because it has just kind of come back to where it was about 18 months back. It is not really fallen on a two year basis. If you look around Asia, you look around Australia, you look around emerging markets, Brazil, where do you make case for even a moderate bull market or even a flat market? There is just completely, no sign of hope for large parts of the equity world. So, I am of the opinion that this year, particularly in the first half is going to resemble in some sense, a second half of 2008. Q: Almost a bear market like situation? A: Well, that is the kind of debate that I have had with many people for a while now, that actually, we have been in a bear market globally for a long time. I recall in 1999 or 2000, Warren Buffet had said that he does not believe that equity returns incrementally. That was I think he was talking in 1999 end or early 2000. Incrementally, the returns would be matching the returns of the previous 15-20 years. And guess what, he has turned out to be absolutely right that the Standard and Poor’s (S&P) 500 was 1,500-1,600 at its peak in 1999 and today, it is 1,900. So, over a period of 16 years, all you have got is a couple of percent a year kind of move, I you include dividends, maybe that is another 1.5 percent.  So, in my mind, that is still a bear market. Over 16 years, if you have delivered virtually no returns, that is a bear market, right? Japan has been in a bear market for two and a half decades. Europe, again, reasonably strong bear market barring small markets here or there. Asia, emerging markets have been in a bull market or were in a bull market till 2007 end. After that, it has just been a grinding market for most of the markets. India being a little bit of an outlier. But, if you adjust for the currency, then even India has not taken out its highs of 2007. The dollar highs of 2007, the peak of the market has still not been taken out. I think we are good 10-20 percent away from those highs. So, for a foreign investor, India still remains and has remained for the last 7-9 years, in a bear market.  So, what we are seeing now is a more stronger manifestation of a bear market, but it is already been there. It has been there on a stealth basis. We have had a bear market globally in equities for quite a while now.

Q: Do you subscribe to the theory that the way China is moving and the way some of the data in other parts of the world are coming out, we could be headed towards a global recession triggered off by China? A: Again, think about it, and this is something I have said many times that first look at the equity markets. Despite these kind of low interest rates, markets had delivered virtually no returns for years on end. Despite such low interest rates, the globe has, the world has delivered almost no real meaningful economic growth. So, the fact of the matter is that if you adjust for interest rates, or if you adjust for normal interest rates and then look at equity markets, and then you look at actual macro economic growth, there has been a recession, for years globally.  So, remember this zero interest rate policy has kind of tapered over or masked what has been in reality a bear market in equity markets, and a recessionary condition almost across most major economies in the world. So, again, things reach a point when it becomes very apparent to the world that there is a bear market or there is a recession. But, if you are a close observer of data, a close observer of rates, you would have definitely seen this coming. I do not think it is any great science on my part to say that I say this, but if you are looking at data properly and you are looking at market action properly, what is happening is not a surprise. Q: What do you see falling more from here? Do you see this continuing to be an emerging market problem or do you see 2016 being a year where developed markets and emerging markets fall in tandem? A: If you go back 2008 for any kind of reference, I think both of them did almost equally badly. In fact in the first half, emerging markets did relatively better because oil had rallied to USD 150 and generally commodities were relatively strong, so markets like Brazil, etc. were still quite resilient in the first half. Really that crack happened in the second half, but the US market was in absolute disaster. So, my view is that we can say that developed markets will underperform emerging markets and which I do believe can happen because that is the area where the outperformance has been quite remarkable over the last few years. They have beaten emerging markets handily.  So, when things turn bad, then obviously, people want to take money off the table on their winners rather than on their losers, because the losers have already tanked and just to give you another piece of data. The emerging market exchange traded fund (ETF), the most liquid ETF for emerging markets, which is EEM is now USD 31 and it was USD 31 in 2006. 10 years, zero returns. So, that is something that people now, probably it is like conventional wisdom that look, this asset class is not looking good, so let us take money off the asset class which does not look good which is primarily developed and within that the US. So, it is very likely that the US might actually get hit more than emerging markets, at least for a few months in all this year.  But, directionally both of them are down and that is unfortunately the reality. Q: It is an interesting point because locally everybody has been scratching their heads about this foreign institutional investors (FII) outflow problem that we have seen in the second half of this year and it has been a bigger problem across other emerging markets, and the general view seems to have been that it is because sovereign funds are selling because of the oil problem. You are saying that you cannot just wish it away, it is just an oil related problem. There is general disenchantment with the emerging market equity class. A: Exactly right. Again, looking at data, looking at history helps. Emerging markets had been an absolute dog, equity asset class till 2003. Throughout the 1990s, for instance India, our dear old India, did not take out its highs of 1992 till the late 1999 tech boom and that too it was very centred around the technology and the market which drove the Sensex to 6,000 odd. But the old economic companies remained flat for nearly 10 years. Larsen and Toubro actually had put that as a slide in presentations to investors that guess what the returns Larsen and Toubro delivered over the 10 years was in the 1990s. It was precisely zero.  So, the fact of the matter is emerging markets had been a terrible asset class through the 1980s and the 1990s and for a brief while in the tech boom, markets like Taiwan and India did briefly well, but that was very short-lived as we all know, that fizzled out within a matter of a year or so.  The real bull market in emerging markets started in 2003 and by 2007, it was all over and after the 2008 crisis, the emerging markets have gone nowhere but down. Again, China coming out of the blue, delivering a cameo innings of 100-150 percent, but then we know how that is ending. I mean, that is not a bet any sensible fund manager can take the way the China markets have behaved. So, rationally, emerging markets have done nothing for investors. For decades on end, barring a brief period of four years.  And now, people are going back and saying that guess what, if you look at the ETF data, ten years, zero returns, why are we even looking at this set of equity markets? Why can we not simply focus on what is well understood? Because, remember, again, most of the money is anyway coming from the West and within that the US where tech has been doing reasonably well. There are enough pockets of growth within the US economy. Even in consumers or in technology. So, why do we even need to go and waste time looking at these kind of markets which have promised a lot but delivered very little. So, it is not about sovereign wealth funds alone, there is a general problem when you look at emerging market long-term returns shorn of these four years between 2003 and 2007.