Mumbai: Since late 2007, when it appeared that the Bombay Stock Exchange’s benchmark Sensex index was exempt from the laws of gravity, Shankar Sharma has been predicting a coming fall.
India’s most tracked indices, Sensex and Nifty, were back in the red on Thursday with investors rushing to sell stocks across board. Sensex, which rose a little more than 700 points, or 5.4%, on Wednesday, surrendered a large part of its gain and lost 4.18%, or 570 points, to close at 13,094.11 on selling pressure. The broader 50-stock Nifty index lost 4.09% or 167.60 points, to once again pierce the technically important support level of 4,000.
With this, Sensex has lost close to 36 % this year, shaving off Rs29 trillion of investors’ wealth. Foreign institutional investors, or FIIs, the main driver of Indian market, have taken out $6.45 billion from Indian markets, after pouring in $17.36 billion last year.
Analysts and fund mangers are now convinced that the bear market that has set in could well extend to the end of this year and even beyond.
Many home-grown bulls, including ace investors and mutual fund managers who made a killing from their investment decisions in the five years between April 2003 and January 2007 when the benchmark rose seven times from 2,924.03 to 21,206.77, are now absent from the market.
Globally, there are established doomsayers who bet against the army of bulls but in the Indian market nobody wants to be branded a professional bear.
Sharma is the closest India has to a bear.
The joint managing director of the Mumbai-based First Global group, which runs brokerages and an investment bank with subsidiaries in the US and the UK, continues to believe that the Sensex could hit 10,000 levels and says he “would not be surprised if it goes even below”. First Global derives 60% of revenues serving overseas clients.
Edited excerpts from an interview:
You are probably the only bear in the Indian market....
I don’t agree with the term bear. Our job is to get the market right for our clients. That is what people come to us for. Our views on global equities turned negative late last year. We turned negative on global equities around May-June last year, even before the sub-prime crisis (in the US) erupted.
What made you think along those lines?
We saw conflicting signals in equities market. There was a disconnect between what the global indices were telling versus the market internals across emerging markets. The entire bull rally in emerging markets was led by just two markets—India and China. This was when there were 15-17 different markets of some consequence in the basket. Again, within India the internals were weakening. Only a few companies, the Reliance group and two or three banks, were taking the index up.
A doomsayer? Shankar Sharma of First Global group. (Abhijit Bhatlekar / Mint)
It was probably in December last year that you first spoke about the Sensex going down to less than 10,000...
It was an easy call. In this bull run, India was termed an asset class. We were starting to think of ourselves as very special. I started getting worried when such rubbish started going around. India is not any asset class; it is only one of the markets.
This kind of euphoric situation can last only for a while. In 2007, every Tom, Dick and Harry could think of making a billion-dollar personal fortune. Employees across industries were getting salaries which were not justified even at the peak of any cycle in the US. It was getting ridiculous—wage inflation, asset inflation. If one had stepped back and viewed it dispassionately, it was quiet easy to figure out.
Look at China, the economy has been growing more than 10% every year but the market is still down some 65% since November last year.
So, is the India story over?
We think (the) emerging markets (stories) are over for a while. India is going to do what pretty much its peers will do. Sometimes it will do better; sometimes not so good. It’s unlikely that it will stand out of the pack. When the entire emerging markets turn up, India may turn higher than some other markets.
Do you see any change in the contour of the problems?
The problems started with the subprime crisis last year. However, now it is very much a local issue. India’s 9-10% (economic) growth was just an aberration. We do not understand that growth requires sustained investments and we don’t do enough of it. We got the benefit from a lot of slack capacity that got built in the second half of the ’90s which was not utilized till around 2003. There was huge pent-up capacity. Now we are through with it.
So, you saw it coming?
Historically, no equity market has given huge returns for six consecutive years. After five years of a bull run in emerging markets, a slump was due. The reasons could vary. The five-year rally, that has offered around 50% compounded return, was phenomenal by any standard. The last time we had this phenomenon was in 1987-92 when there was a 62% compounding growth of returns from investments.
Is the pain over?
The maximum downside one had seen in India was about 35% in a year in 2000. We have breached that already by the middle of the year. Now we are entering a situation where long-held theories can be thrown out of the window. We could be down another 30-40% from here.
I would not be surprised at all to find Sensex below 10,000. When we made an initial target (for the index) it was based on other factors and the run-away inflation was not in sight. If we factor it in that, the trouble gets compounded.
When do we see a revival?
Our basic belief is that liquidity does not matter. Markets create liquidity, and not the reverse. We need to wait another two or three years for a revival. It could be even shorter—just a year and half; but definitely not this year.
There could be many rallies in between, but those will be fake rallies. They will shake your belief. But the bull rally will not come back soon. The data shows that if market rallies continuously for five years, then the minimum time it takes to come back is three years. Sometimes, it never comes back. What happened in Japan? (where the market is yet to really recover from the highs it saw in early 1990s.)
In this market, where do you put your money?
In last five years’ markets valued companies that needed a lot of money for their business growth. Now the market will start hating them. When markets are dry, companies which need capital do not get it and this in turn affects their growth. That changes the fundamentals.
On the other hand, the market will support companies that do not need large capital to grow.
So, you are betting on...
We are positive on pharma and IT stocks. Also, we are quite positive on sugar stocks. It looks like a good global play. There could be high amount of ethanol sourcing from sugar.
Another interesting sector is oil exploration. India is still very under-explored.
And the sectors that are big no-no?
We are very negative on banks in India. In fact, banking is the dumbest business mankind can undertake. It’s one business where you do not make any money.
There is still plenty of downside to bank stocks. The market value of ICICI Bank and a few other private banks are now headed to their book value.
Overall, how will you allocate assets for an investor?
This is not time to be brave. Some amount of money, may be 30%, can be kept in equities, in some safe sectors.
One needs to be very cautious of India’s macro issues.
What’s your take on the primary market?
It may take a long time to see its revival. Typically, primary markets take another 8-12 months to become stable after the secondary market conditions improve.
What, according to you, is the most optimistic scenario for equities?
The prices of crude coming down to $75 a barrel. This cannot be ruled out. If the commodity bubble gets punctured, crude prices crash and steel prices fall that will be the best case scenario for the market.
And, the worst case?
If this commodity bubble keeps expanding... Political risks are another big problem in India. We are currently in a very scary situation. For the original bull market to come back, we need to wait for some time. A V-shape recovery (where the rise is as steep as the fall) is not possible.