I think India is going to lag other emerging markets next year: Shankar Sharma
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Mumbai: Shankar Sharma, vice-chairman and joint managing director of First Global Securities Pvt. Ltd, is known for his strong and contrarian views. He thinks that the demonetisation exercise will affect larger companies more than smaller ones. Edited excerpts from an interview:
What do you make of the unexpected set of events, Brexit, demonetization and Donald Trump’s win, that impacted Indian markets?
I would not say the events were unexpected. After the great financial crisis, extremist politics has become popular across the world, be it Modi’s win here or Trump’s win in the US.
I think by now, we should be used to weird things happening. I think 2008 was a watershed moment for the world, not only because of the financial crisis, but because of the impact it had on people’s mindset and psychology. It hit them hard that they lost their jobs, their savings dwindled and so on. They were then willing to gamble with their politics, or take a blind, under-analysed bet on anyone who promised them these basics. People have been hurt widely since 2008—they are angry, bewildered why their perfect lives suddenly went bad—and smart politicians across the world have leveraged on this by showing easy cures and fantasy fixes. The extremist politics is just people’s answer of their outrage to “why us?” That is what also led to events that we saw in 2016.
How do you see 2017 panning out for Indian markets?
I am very negative on large cap (stocks) in India in light of the recent demonetization. I was tepid about them before. I am, however bullish on Indian small cap stocks and micro-cap stocks.
Demonetization has been a big, big shock to companies’ earnings and economic growth. The near-term impact is significant. I do not hold out much hope for large caps in terms of their ability to recover quickly. Banks will be the hardest hit as there is no credit offtake and (there is) a slowdown in demand. It may even hit recovery of loans, and even add marginally to non-performing assets.
Why are you bullish on small caps and micro-cap stocks?
They don’t necessarily have to bank on government or strong domestic economic growth per se. Small companies can find a niche area, a good product or they find demand from a specific industry. So, I find many of those attractive bets in small and micro space. Some of those companies have corrected, and valuations are pretty attractive.
Where do Indian equities stand vs emerging market peers in 2017?
Before demonetization, I was reasonably optimistic on India outperforming emerging markets or at least performing in line with them. India was going to stand a little behind commodity-producing markets, which had rallied on the back of a recovery in commodity prices. There was, however, a good monsoon after two bad years, and consumption was finally looking up. There was general optimism on earnings growth, which has been very tepid in the last few quarters.
However, post demonetization, things have turned bad, at least for a few quarters. I think India is now going to lag other emerging markets in 2017.
Whatever tepid growth rate we were seeing, that also is in question right now. Also, post a shock like that, while people say it will hurt the economic growth for one or two quarters, the point is nobody knows. Macroeconomics is not arithmetical. It is not like I give x input and y output is delivered. Sometimes, it may happen, sometimes it may not, and sometime a completely un-modelled thing may happen.
It is very clear that the economic growth momentum is broken. How does it come back, how much you need to stimulate for it to come back and whether we have the firepower to stimulate that much, we do not know. So, suddenly from being reasonably okay position, we are in a situation where we need to invest hugely to repair the damage.
If you are thirsty, you drink a glass of water. But if you are dehydrated, you need to be put on the drip. Now, the stimulus has to be disproportionate to the loss the economy is suffering. Does the government have that ammo?
Do you think demonetisation was a wrong move by the government?
That is not a call I can take. It is for the government to make these decisions.
Do you think there are more negatives than positives from it?
If you want to look at it from the lens of politics, I think it is a terrific move. If you look at it from the economic or financial lens, it’s a very muddled picture. For a government in power, the objective is to win elections at any cost. If this helps them achieve this, I think it is all okay, because ultimately like an asset management company’s sole purpose of existence is to gather assets, the sole purpose of a political party is to win elections. Period. Performance etc. are all secondary.
The goods and services tax is set to be implemented next year. How do you see things shaping up post its implementation?
Even before demonetization, the general consensus has been that there will be a near-term impact of adjustment and understanding of GST on economic growth. There are various factors that come into play when a big change like this is introduced. So, even without demonetization, it would have had a significant near-term impact in terms. Now, post demonetization, we are looking at a double whammy to the economy in the immediate future after its implementation.
What is your budget wishlist ?
I am not a big budget analyst or a big budget watcher. In my view, Indian budgets are generally fairy tales and I don’t believe in fairy tales. I don’t waste my time analysing it. I think it is just a statement of intent. I don’t listen to what they (government) say, I only watch what they do.
Private investment demand has not revived for a long time. What is the missing piece that can help revive this?
This government has decided as the Big Brother that “I will do the all the spending in the economy because I know better than an individual consumer as to where to spend”.
So, if you see all the economic auctions—all money flows to the government that obviously gives them the power on how low the pricing for telecom etc. can go—the government has decided the economy belongs to them, and not the citizens; and they will decide how economic gains are spent, not the citizens.
As we enter 2017, which sectors do you really like in Indian markets, and which sectors would you avoid?
The one sector I will definitely avoid is banks. Banks have been over-owned in India. In such a situation, upside usually gets capped. After demonetization, private lenders will suffer as consumption hits a hurdle. Public sector banks that primarily lend to industries were, as it is, going through bad times. The economic slowdown is going to hurt even more than before.