Mumbai: First Global Stock Broking Ltd’s Shankar Sharma spoke to CNBC-TV18 about why he sees the current stock market rally ending badly and soon, and the warning signs one must watch for an indication of flagging momentum. Edited excerpts:
Is the bear market over?
Sceptical: First Global Stock Broking vice-chairman and joint managing director Shankar Sharma says he is a ‘fearful bull’. Abhijit Bhatlekar / Mint
I don’t want it to get over because if in a bear market we make 100% in two months, and it is impossible to make this in even a year in a bull market, why would anyone want this bear market to get over? This is amazing. We see IIP (Index of Industrial Production) coming in at 1.4%, which is an amazingly high number in the context of the -1 that we were running... So, we want the bear market to continue because we can make a lot, a lot faster and quicker than we can in a bull market.
But do you think a durable uptrend has started despite the moves of the last few weeks?
Let’s go back to last year when we were genuinely very bearish, and I do remember having expressed a certain notion that a big rally in this market would take us close to the highs of 16,000 or 18,000. I think probably after the October meltdown that had happened, the fact that we are in one should not actually surprise us and that we have done it so quickly is a matter of surprise without any doubt. Given the magnitude of the fall last year, there was one big rally this year, and that is exactly what we are seeing as of now.
Going back to 2007, I was a pretty fearless bull. In 2008, I was a fearless bear. In January, February, March 2009, I was a fearful bear. And now, I am a fearful bull. So that is the evolution we have played the markets and we have been reasonably well in the last three-four weeks, particularly post-elections. Since the elections, our view is that we are going to see a very strong uptrend, particularly in the second liners. And that is precisely how we have seen the markets play out. I suspect that we (will) continue this for about a month, but globally, enough faultliness are appearing in this rally.
As any reasonable analyst, one must take note of those factors just as the reasonable analysts would have taken note of the “green shoots” theory in March and even in April. So the reverse of green shoots—I don’t know what that word is—are probably now beginning to appear in the form of rising bond yields. Economic data is still not being robust, but commodity prices are being robust and this can lead to a similar situation to what we saw in May, June and July last year, when the world was slowing down but crude, copper, etc. were rocking; commodity stocks were doing very well, the steel stocks were doing very well and inflation was rocking as well...and we know how that ended. So somehow, uneasily, I do feel that we are headed in a similar direction.
Let me ask you about the bullish aspect of it. One more month, you said. Do you think it is conceivable that the index goes to 17,500-18,000 before it tops off, or are you saying the index won’t move that much, but the broader market will do better even from here, if there is one month left in the rally?
Well, the latter. You won’t see the narrow indices do very well—i.e., the Nifty and the Sensex—I mean, they would be up but they won’t be up as spectacularly as the second-line indices. And that is pretty much the pattern that we are seeing since the election results came in. The Sensex has not moved as much as the second-line index has, and so this big disconnect in performance, we think, is going to continue till the budget and a tad thereafter. But you think that is the worrisome thing—that when you see the rallies of this kind, they are great to enjoy, just as we enjoyed the November and December 2007 rallies, or the January and February 2000 rallies. We are in that kind of a situation. I don’t think that it is doomsday as of now, but I think that we are getting close to that in four-five weeks’ time.
Would you still be riding it with your bullish positions right now, or would you be slowly starting to take profits?
Our view is that the best rate right now globally is the commodity space, which is really the metal space. Oil we have been bullish now since early 50s (dollar levels per barrel), but not, remember, for any fundamental reasons. Oil demand, I don’t think, will bounce back in any meaningful way for a while to come. But I think markets are not just about fundamentals. As I have said many times, we have a very crude but effective way of looking at the markets, which is that momentum is the only thing that works perennially. Valuations and fundamentals don’t necessarily work all the time. And the momentum is looking pretty strong. And we will see when that begins to slacken, that the rally will still continue. Especially in metals like copper, and in some specific stocks belonging to that sector, the rally will come. Oil on its own at $80-85 is pretty much on the cards.
The other aspect is, again, the weakness of the dollar. The way the dollar has been behaving lately, I am not making an outright case out of that, but I think it is possible, I reckon a 50:50 chance that the dollar makes a new low against the euro, in which case you will see attendant issues emerging out of that...which is that the commodity prices are very strong but the inflation coming back strongly and most importantly, US bond yields going further than where they have reached. But this cookie can probably fall apart with the combination of these factors that I am outlining; which I reckon may take a couple of months to play out...well, maybe six weeks or three months to play out.
Even if the markets top out like you are saying, for this intermediate trend in four, six, eight weeks, what then? Would there be a shallow decline, which will get bought and the markets will eventually try and head higher, or would you then look at the whole trend in a very different light: that one trend has ended, and re-examine the new trend, which has started with a correction, with a fresh pair of eyes?
I think the latter. I think the debate is on whether the lows are really in place, and I don’t think that it matters. All that matters is that if India was to go to 16K (16,000 points) in the next three weeks, and from there it sells off, let’s say 30-40%, and takes us back to the levels of 10-11K, believe me, the feeling would be exactly as if it has made a new low. There would be a lot of loss and people would be down 50-60% in a matter of a few weeks, and there will be enough blood on the street for us to believe that the bear market never went away, and it was just a mirage that it had gone away. So irrespective of whether you go to 8,000 or not, even if you went down to 10,000-11,000, the feeling would be exactly the same. So my sense is that you have a scenario of a huge market disappointment. Forget the numbers. They aren’t looking good anyway. I am saying that the pure momentum will slacken significantly, in which case it will force all of us—the new and the old bulls—to re-examine our basic premise that the bear market is dead and that the bull market is back. I think that move is there in the woodwork somewhere in the next few weeks or months.
We have seen three months of real solid momentum. Why can’t it continue for longer than a couple of months? What makes you think that the momentum is about to turn in a few weeks’ time from now?
A few weeks are enough for a 20% move in the markets. So don’t get lulled by my prediction and say that the markets will only do 2%, or 5%. Markets can do a lot in four weeks... and we want them to do a lot because the whole world is living now in a faster time cycle. So recessions last only a few months and bear markets last only 12 months...and we are barely three months old, and we may last another eight weeks. But we can do a pretty strong move in that and I cannot discount that, and my sense is that we have come a long way far too fast. All vertical rallies of this kind end badly, almost without exception. Why they end, we don’t know. But they do end. As of now there are enough fundamental factors that do stare me in the face for me to say fairly, that in the short run I can see that none of those things will matter. But just when these things begin to matter, the markets begin to react quite quickly, which means that it can have a big sell-off.
On a bubble meter, if I can coin that phrase, if 2007 was 9, what would the reading be of the last three months?
It is not a bubble. Remember, put it in this context: We have had a deflation of equity prices last year and we are seeing a little bit of inflation of equity prices this year, and even after having run up so much, I think a lot of the stocks are significantly off from their peaks. This only tells you how big a bubble the old one was. Even after having such a strong run, you look at so many stocks and the peak is a huge distance away and we are running a marathon and saying that look, we have come a long way. And then, if you look at the distance, it is only 10 miles. It is something like that. It is still a fair distance away. I don’t think it is a huge bubble, but given the compression of the time frame of this, one could argue that this is a garden-variety bubble.
Let me present this scenario to you: that the market corrects but then consolidates between, say, 12,500 and 15,000 for a few weeks, which is maybe just 15-20% lower from here, and then eventually over the next six months goes on to a new high which is 21,000-plus. Possible?
Possible, absolutely possible. I have been around too long to say that it is not possible and that it cannot happen. Jeremy Grantham (the investor) wrote an interesting piece saying that the amount of money that has been thrown at the so-called problem, that may or may not move the GDP (gross domestic product) but that may definitely move the stock markets because in the stock markets, it is barely 30 stocks you need to move for the stock markets to look extremely good. That is probably what the phenomenon is across the world, particularly in the EMs (emerging markets), given the fact that the dollar does look extremely weak in the short run. There is nothing to suggest that we can’t get at least close to the highs, if not absolutely make new highs. Whether we sustain those highs is another matter. But you have a fair shot at it and it can’t be ruled out.
What is the more likely outcome in the foreseeable future as you see it, beyond the next few weeks? Do you think global equities and Indian equities can rediscover a secular trend up or down? Or do you think we will have alternate bouts of bull or mini-bull and mini-bear markets over the next couple of years, six months each?
It will be navigating your way through the molasses and I don’t think it will be... Go back to October. We had a 30% down month, so flip it around this way... May was an extraordinary month. Don’t bet on repeats of that happening. We will need to settle down to a more gradual pace of rise and faster declines, mirror opposite to what happened in November-March; we will see the reverse of that happening. The rallies will become weaker and the declines will become sharper, because we have put in almost 100%, much as Goldilocks desired. I doubt it will be that simple. And bull and bear become friends, and the challenges are still there, we will play the momentum game, we think we can exit before the momentum goes out of this mini-bull markets if you want to call it that, but to expect that the next three months will be as easy as May, I think being a bull that’s quite optimistic. If you were a bear in November and think that we will make 30% back to back returns on top of October, that is optimistic as well.
What would you look for as the first warning signs of flagging momentum?
When global equities start underperforming global commodities. Because normally, the two should go in the same direction. When the two begin to diverge and you are seeing some signs... India has gotten drunk over elections. So excuse it. Other markets have been struggling, industrial commodities have been doing well—gold is not in the same category, but that hasn’t done badly either—and I think you are seeing the first signs of that disconnect. Markets don’t normally repeat what has happened so quickly...but it’s better to be a bit cognizant of what happened in May-August.
You described yourself as a fearful bull... At this point, is the accent on “bull” or on “fear”?
It’s an oxymoron, right. Bulls are not supposed to be fearful. Bears are, because the tide is always against them. I think I’m fearful. You can place equal weight on both. When I talk to people, and tell them to buy rubbish companies, they ask me if I have lost my marbles...and I say: Yes. You have to lose your marbles to make money in this market. I think markets are meant to make everyone poor. Only a small percentage are rich, and I want to be in that small percentage...and hopefully, so do my clients. That’s why I’m fearful.