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Last Updated : Nov 21, 2016 10:03 PM IST | Source: CNBC-TV18

Tough to regain pre-demonetisation growth momentum: First Global

Impact of it could go beyond December and the government will have to provide some stimulus to boost businesses and people, said Shankar Sharma, VC and Joint MD of First Global.

The government’s demonetisation drive is likely to bring significant damage to businesses, trade and jobs across the country, believes Shankar Sharma, VC and Joint MD of First Global.

Impact of it could go beyond December and the government will have to provide some stimulus to boost businesses and people. Sharma added that it might be difficult to go back to the growth momentum that economy had seen before demonetisation.

Banks though are getting high deposits will see difficulty in credit pick-up.

“It is a great time to buy something little,” Sharma said, speaking of the market. While recovery in large-caps still looks difficult, small and micro caps continue to look good.

Midcaps that have corrected already can also be looked at.

Below is the verbatim transcript of Shankar Sharma's interview to Anuj Singhal and Sonia Shenoy on CNBC-TV18.

Anuj: This demonetisation this is one word which has clearly brought our markets to its knees. What your sense, do you think this is a bit of a near term bear market in India?

A: The fact of the matter is that in all such situation you have to complete remove the talk and the high and the chatter and just focussed on the data. The data is pretty clear that most of black money is not held in cash, the data varies so it is like between 5-10 percent of the alleged black money is in cash - - so to say that all the notes in circulation are actually black money is not entirely accurate, some part of course is.

Now in order to target that the real question that any analyst or facts and data will ask is whether this is the best way to do that or are there other ways to achieve the same objective which is more limited damage. Now deed is done rightly or wrongly it is what it is. You can only now analyse the impact the good and the bad. What is visible right now anecdotally pretty much across India is that there is a lot of pain and based on people who are economist and analyst who were doing on the ground were raise from pretty much parts of India..

The feeling is that there is going to be significant damage to businesses and to jobs and employment and trade. That I think is something we can all accept. Now the question is really whether that thing gets unwound by December 30 or that last longer. Based on what the market is telling me, I think the impact could be definitely beyond December. I don’t think we should be saying that the impact will cease, at the moment the cash conversion window closes on December 31 - - market is basically reflecting that.

The other question that arises is does it mean let say even that there is hard evidence that after two quarters the economy sort of bounces back. The question that is more central is does it bounce back to the momentum it was building up to prior to this announcement, which is that after two years of terrible rural growth and bad monsoons we had a good set of monsoon, numbers were expected to look better in the wake of good monsoon, in that situation we have had this announcement you can call it a shock, you can call it whatever you want to call it, but it is there.

Now even if the economy recovers does it recover back to this pre-announcement momentum, my sense is having analyse momentum in market for decades is that when momentum break and it takes a lot more effort to bring it back to the momentum that existed prior to the break of that momentum.

It is not just a normal situation, you will need to stimulate. You will need to provide all kinds of stimulus for people to regain confidence in businesses. That is going to be costly it is not without its cost. On the balance if you look at it very dispassionately, the short term costs are far outweighing the long term benefits, because long term benefit we need to see what happens, but the short term costs are going to be significant and that is really what the market is reflecting. The tape is telling you the story.

Sonia: That’s about the demonetisation impact, but what about the market because on November 12 you tweeted that the impact on earnings could be significant and of course the repercussions on the market as well, but since the demonetisation announcement the Nifty has already fallen about 600 points. Do you get a sense that things would get worse?

A: I wouldn’t say that. If India was participating on the way down along with other market then one could say that there is a general problem in emerging markets, because of the Trump victory and the strength of the US dollar, but India is standing out, India is standing out on the way down which is rare for a market like India, India typically outperforms in moment of crisis or moments of great dollar strength.

This time even if you look at today’s Asian markets or even Europe - - they are flattish to moderately up, while India is the only one which is tanking. That relative move of India which I have been seeing for the last few days since the announcement is not very comforting. It could be possible and if you look at banks in particular, because they are the single largest component of Nifty.

They are taking it on the chin here and that to my mind is signifying that yes there is a flow of deposits into public sector bank, yes there could be lower interest rates, you are probably going to see rates on loans being cut, but is that stimulus good enough to unwind the damage on the large informal economy in India and that large informal economy in India does buy goods and services produced by the formal economy.

Your cars and your all kinds of goods and services are consumed by everybody whether they have cash or whether they have credit cards, that is really my real worry here that bank may not see credit off take, so they will have to take a hit on margins, because when you are snowed under by large amounts of deposit and you have no place to park those deposits you end up taking a hit on your margins.

This flow of money into bank is not an unmitigated positive, there are shades to it and my sense is banks are not going to be in a very good spot, because of this huge flow of deposits. Now they are talking about the industry or talking about consumers, I think pretty much there is consensus they will be hit at least for this quarter not two quarters.

As I said whether after two quarters you are going to go back to this level that’s the big question I don’t have an answer to that really I do not.

Anuj: Your big call over the last 2-3 years has been that Indian midcap and small cap is the best asset class right now. Is that call also at risk, because this whole move is impacting SMEs, MSMEs where cash economy might not be illegal, but is quite a large part of economy, so is that call also at risk. We are seeing some of that play out in the recent midcap and small cap underperformance?

A: In moments like this everything is at risk, so there is no point in nuancing too much at this stage, when the dust is still swirling around. When the dust settles my take is and continuous to be so that many midcaps which are down 20 percent, which are down maybe 30 percent are still excellent bets.

As I have said repeatedly, I do not see large caps are the place to be in and we have discussed this many times and I do not see a quick recovery for the large cap segment for a variety of reasons whether it is the consumer end of the market, the banking end of the market or the IT and pharma end of the market. I think largely large caps are not looking good, they were not looking good even prior to this announcement - - post this announcement they are looking terrible, but I continue to believe that small caps, micro caps are still excellent places to be in, but that not to say that they can’t fall 10-20 percent more - - they are like pieces of paper being tossed around in a tornado, they can go anywhere.

Let the dust settles down and then I am sure great deal of value will emerge and I can already see that, but to say that be brave and go and put all your money in, I don’t think that’s the smart thing just yet.

Q: So what is the advice to long term investors, because traditionally we are thought by expert you can find a lot of opportunity during adversity, but of course we don’t know when this dust is going to settle and how long it is going to take, what’s your advice to long term investors now?

A: Again very people sit on cash at bottoms of the market and most people are fully invested, so there is very little deployable cash. My sense is like I just said stocks in sectors that I have liked for instance infra I think will be relatively unscathed in this, because rates will decline because a lot of deposits coming in and there is very little credit growth - - so I think that sector is still a good place, exporters are still a very good place so I like chemical by and large an exporting sector, the rupee is going to depreciate in line with other EM currencies and in particular because of this issue.

I think broadly the micro cap areas like where I have liked they are broadly the story still remains intact if anything a little better now, but that not to say those stocks can’t fall 10-20 percent all bets are off in such situation, so today to say that look this is a great thing to buy a little bit that’s the only thing I can say.

Anuj: So may be buy some now and be ready with more cash if the market gives another better opportunity maybe sometime down the line?

A: Yes, that is my view.

Anuj: You spoke about exporters but in that you are very clear that that will not include IT, because that was your other big call which has worked out pretty well that the business model is at risk, so no point talking about valuation there?

A: Like I have always said I am not a big fan of valuation and I don’t believe that they work at all, you can justify 5 times earnings for anything, you can justify 500 times earnings for anything.

The real issue is IT, IT unfortunately now doesn’t benefit much from a falling rupee, because your top line itself is under pressure, so even if you have 3-4 percent fall in the rupee and you are looking at a 3-4 percent contraction in your top line and on net-net you are where you were and that place where you were wasn’t looking very good even prior to this announcement. I think IT is in still trouble, pharma is still hurting, so I can speak about it Nifty, Sensex flattish for nearly two and a half years now, but small cap, micro cap have been a complete outlier in that sense.

Sonia: I am sure the government is taking cognisance of the kind of slippage that we have seen in consumer demand, the wealth erosion we have seen from the stock market, even since their move. What do you think the government should do now or what do you think the government can do now to sort of offset the damage that we have seen already? Someone earlier was suggesting that they should immediately come out with a fiscal stimulus, sort of cut petrol prices, cut excise duty to offset the part of the damage, but what would be your assessment be?

A: Look I am not qualified to make such high level assessment. I think all these things should have been moderate for, if I were sitting in a position of authority I would have definitely model for a lot of this. None of this is really unexpected if you thought about it very rationally and you looked at the data surrounding in all such moves across the world.

What I am hearing is income tax might go altogether, Jan Dhan accounts might see a large amount of money being deposited, may be Rs 10000-20000 per account for certain levels and below, all that are palliatives. I think you have to distinguish between wealth and income. I might give you one lakh rupee today if you are hurting but if your growing concern thing is itself in a question mark then that Rs 1 lakh doesn't help.

If you lose livelihood, your livelihood takes a big hit, then giving you a one-time gain is just like a drop of gasoline on a hot day, it just evaporates. So, my real fear is that will get hoarded, that will not get spent. When people enter crisis situation, they end up hoarding money, they don't end up spending that money. So, that effect will remain for a while.

I don't how long that will remain - maybe a quarter, maybe two quarters but people will be reticent to part with any stimulus that they are given, that is the real question here. In crisis people curl-up, people don't expand whether it is an individual or a business.
First Published on Nov 21, 2016 03:32 pm