Inflation has proved to be more problematic than anybody anticipated, said Shankar Sharma, founder of GQuant Investech. In an interview with Moneycontrol at the venue of PMS Bazaar’s Dubai Alternative Investment Summit, the market veteran talked about what will move the markets, the impact of the Hindenburg report and George Soros’ comments on the Indian economy, and the fall in shares of new-age companies. Edited excerpts:
What will be the next big triggers for the Indian market?
The trigger is going to be a softening in the RBI’s tightening stand because there is enough evidence that there is an impact of the rate-tightening cycle on consumer demand, both in rural India as well as in urban India. If you look at the numbers of consumer companies, Asian Paints and others, it is telling you that there is a softening in demand. So I think the trigger is going to be the next policy meeting when the RBI probably should give a pause or enough indication that it is turning dovish, instead of hawkish.
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Globally, do you think inflation is still a worry?
Yes, it is proving fairly sticky, which is a problem. One of the reasons is that the Russia-Ukraine war is not ending any time soon. So that will keep prices elevated for a reasonable length of time. Also, the fact that the central banks globally and in India have probably been caught napping. They were too focused on growth and less focused on price stability, and that is now hurting them. Inflation has proved to be more problematic than anybody anticipated.
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Since your last bullish call on small-caps last year, this pack has had a decent run. Is the rally done or is there still some steam left there?
Remember that small caps are not going to be giving you steady compounding [returns] the way large caps potentially can. There will be a very compressed period of returns. But when I look at small-cap numbers, I look at many companies, many companies that I have investments in, I am very optimistic as a group and, of course, you need to pick carefully. It's a dangerous space for the uninitiated investor. It is not an easy space to make money. You will have many bombs going off here and there. We have bombs going off in large caps also, as we know. But more so in small caps.
What's your view on new-age companies? Does any company look interesting to you after the recent 60-70 percent correction?
People miss the point. Something was priced Rs 100 and became Rs 30, so 70 percent fall. Doesn't mean the 100 level was justified in the first place. These guys should have listed maybe at 20. So, in my view, they will become undervalued, if at all. They will become undervalued at 50 percent lower, maybe even 80 percent lower. You overvalued the IPO (initial public offer). So everything looks cheap in comparison to the IPO. Okay, they're down 70 percent. But that Rs 100 price of the IPO was never justified. They took advantage of, let's say, foolish investors, and then pumped and dumped the stock – as simple as that.
So no company as of now?
There are far better ways to waste your money. Let's put it this way – you should eat well, drink a good bottle of champagne rather than spend money buying these kinds of rubbish companies.
Talking about the economy, do you think events such as the Hindenburg report and George Soros' comments can hit India's investment appeal?
So, let's segregate the issues. Hindenburg is not a report on India. It’s a report on a corporate group. I cannot understand why people start merging the two things, as if there are no other companies in India. There are great companies in India – Tata Group, Birla Group, and Ambani Group. Also, there are other smaller groups. You're saying that one company is equal to the collective reputation for India by all these companies? That's absolutely ridiculous. And that is being unfair to a great country and a great market like India.
It's a group which has been in the news for all kinds of wrong reasons lately. It was for the right reasons when it was running up. Now, it's the other way around. They will deal with it. It's their problem. It is not India's problem.
It's not the Indian stock markets' problem. It is an isolated problem. No way does it percolate or seep into the rest of the companies.
Coming to George Soros, he has been a big supporter of democracy because of his history of having come out of the Holocaust, because he survived the Holocaust and Nazi Germany. So his belief is that the world needs more and more democracy and he is vocal about it. And that's his point of view. To say that is again going to hit the appeal of India – I'd absolutely disagree. That's his point of view, whether you accept it or reject it. No investor makes decisions or serious investor-based decisions based on isolated corporate events, or the point of view of one person, no matter who that person is.
What would be the biggest risks in terms of India's growth?
The risk is going to be the fiscal deficit. We are running a 6 percent fiscal deficit. The government has indicated a glide path to I think 4.5 percent in three years. Assume that it comes true, that the government actually manages to reduce the fiscal deficit. Where will the reduction come from? The reduction can only come in the discretionary part of the budget. So the discretionary part is capex (capital expenditure). And that is what has actually helped India in this turbulent time. The government has done the spending.
Also read | FM retains revised estimate for fiscal deficit at 6.4% of GDP for FY23, FY24 aim at 5.9%
What if the government's 6 percent fiscal deficit comes to 4.5 percent? The cut will happen on capex, because nothing else can be cut. When you cut capex, you will end up having an effect on growth, particularly of companies that have benefited from this capex. So, we need to be a little careful that looking three years ahead, you should be, I'm not saying, negative on companies that benefit from government capex, but at least be careful on that part of the market.
Let's say you have Rs 10 lakh to invest today. What would you recommend?
I'm absolutely clear: pick 50 or at least 30 well-chosen small-cap names. Straightforward hack. Put equal amounts in each of them. So this is a marathon. Put equal amounts on each runner. Okay, 30 runners at the start. Gradually, the field will separate out… after the five-mile mark… there are 5-10 guys who are ahead. In the middle, there are 15, maybe 18, guys. And the laggards, which are the last five guys, eliminate them, take that capital and put it back into new runners or reallocate to the winners, which are leading the pack. That's the way you're going to make serious money in this. Statistically, five out of your 30 bets are going to be huge winners over the two, three, four-year period. Which ones? You don't know. Okay, that's the way to do this.
So nothing in debt, real estate or gold?
No, that's a longer discussion, how much allocation? I don't believe an average investor should be putting more than 30-40 percent in equities. I don't think higher allocation is merited. There is a big risk. We always know that no matter what fund managers say – because that's their livelihood they keep saying put everything in equity – but that's not wise. Keep a decent amount in fixed income. Now rates are very good, very attractive, you should lock in those rates.
