Recovery in stock market will be short-lived: Shankar Sharma
- Devalue the currency sharply to 85-90.
- Bring back inflation. Companies have to have pricing power.
- None of the govt moves are going to aid economic recovery.
Looking at the global cues on one end and the finance minister’s announcements on the other, what should the market make of it as good and bad news are both coming in at the same time?
Yes, it is a bit unfortunate that these announcements ran in on a day which had a pretty bad Asia and a pretty bad global market on Friday close. One had to see what really prevails, which one really wins and I expected a lot stronger market action which might still happen! In India, we have seen that they do have a strong opening, then sell off and again towards the second half of the innings, they play a lot better. It could well end up with a pretty strong gain.
But the larger point is does this change anything on a secular basis or it is just going to be a couple of days or maybe a week or something like that? My view is that it is more of the latter that the market did not fall because of the FPI surcharge or any delay or perceived delay in funding the PSU banks and stuff like that, but basically the announcements that have come through would be taking a very shallow view of what the real malaise is.
The real malaise is this is a crisis of the kind of proportion that I have never seen on a standalone basis in India. I have seen crisis of this kind in 1997, 1998, 2000 Dotcom bust, 2008 global financial crisis. Those were coordinated global crises in which India was partaking as it should as a reasonably sized economy. But actually India appeared a lot more secure in those crises than the other countries. This time it is purely a Make in India crisis. There is no global crisis and nothing says the world is coming to an end. The world is chugging along for better or worse but there is no 2008 or 1998 kind of situation.
India has performed in a very disturbing fashion -- market wise and broad economic numbers wise. I am not talking GDP numbers because we do not know how those are arrived at. But we do know how autos sales are arrived at and we do know how biscuit sales are arrived at. All those pointers are telling us that these kind of palliative measures are not going to be enough to get the economy back on its feet and which is why this recovery in the stock markets will be short lived in my view.
But would you say that it is a step in the right direction nonetheless because last week same time, we were a little worried and there was the chatter all around and the government also was worried. Would you say they are headed in the right direction?
See, direction is immaterial. It is only timing. All crises can be tackled provided you open your eyes and accept it. Second, you move really quickly, instead of telling people that they are just imagining things. For example, this FPI issue. From July 5, we have heard from various quarters in various parts of bureaucracy and ministries. It has been all over the place but the central theme has been frankly collateral damage. They do not add value. They just buy and sell in secondary markets and all kinds of nonsense like that.
If you have to do this, why let the markets force you to do it? What has happened today or rather what happened by the announcement is that the market forced you to deal with the problem. Otherwise, we were all sitting arrogantly and telling the world, look you guys really do not matter, so why are you are creating such a fuss? India is a such a great stock market that even if you pay a bit more tax, you will still make more money here... and then the markets tanked and they forced their hands and now you are coming up with all these measures. Markets are smart. Not all the time, but some of the times, markets are pretty smart. They will read through that I forced you to come to my line of thinking and therefore you are weak and when you are weak, the markets can actually exaggerate and exacerbate that weaknesses.
So here you acted in a way which shows that you got rattled. While if you had acted on that evening of the budget day and said sorry this was a mistake, this was not intended and we are retracting it, nobody would have bothered about it.
Now a month and a half later, you have been forced to do it. Markets will see through your desperation and the real problem is I do not think any of these moves are going to aid economic recovery. That requires a very deep think for stimulus and then the real question is does the government have the money for a stimulus? That is a big, big question.
The RBI Board meet is today and a dividend announcement is expected. Do you believe that Rs 15,000-20,000 crore odd outflows that we have seen from FPIs in the last two months is not coming back?
I am not saying that. So do not get a wrong message. All I am saying is that FPI outflows happen because of economic distress and not because of tax surcharge. That would be a wrong reading of the situation. The markets did not tank so much because of the surcharge, the markets are not in strife because of the surcharge, the markets are in strife because of all the data points, all the commentaries on companies.
The last time I was in your studio, we talked about Godrej Consumer talking about a gloomy outlook or Levers talking about recession three times in a single commentary. The post budget situation has been very grim for several months and has come home to roost now. The FPI outflow numbers are very volatile. I do not want to comment on that but the real point is FPIs is going to take a long term view on India and the numbers have to improve. But will they improve? I do not have the answer to that. There are far smarter people sitting in Delhi who can give you answers to that. Can they improve? They can, but in order to make that happen. you will first need to acknowledge that we have a serious problem.
What do you think the government can do? The fiscal elbow room is rather narrow at this point in time. With tax collection at the level it is, there is only that much they can do. What can the government do by way of reforms to revice the economy which is clearly distressed?
Do you want to hear the politically correct view or what I would do if I was the head of the country or head of the finance ministry?
But that is a problem. When you say such things people land into trouble these days.
Take your pick, sitting far away in Dubai. I do not think that should be a problem should it?
That is never a good answer but anyway let me tell you what I would do. I can say thank God I am not at that position because it is a tough position to be a leader of the country or the Finance minister of a country which is facing a slowdown of this kind. It is very simple.
In my view, you have to devalue the currency sharply and to take the rupee to stay at the 85-90. It has to be a shock therapy to a patient which is a bit comatose right now and sliding fast. That move will do several things. First of all, it will bring back inflation sharply into the system. I have maintained this for years that India needs inflation and killing inflation is a western objective which cannot be a suitable objective for India.
India in particular needs to bring back inflation. Companies have to have a pricing power, earnings growth which is always nominal. Remember earnings growth is never real. It is always nominal. Earnings growth is running at a zero or minus will start to go back up because a company will have pricing power, see a nominal sales growth, therefore your nominal earnings growth will start peaking back to high single digit, if not double digit territory. That itself will lend confidence to the stock markets.
Inflation will also create headroom for companies to give raises to their employees. So, consumption will come back and it will make India a cheap place for foreigners to put capital and so FPIs will keep flooding in. If suddenly a rupee is 85 to a dollar, FPIs will rush in because everything will become 20% cheaper FIIs will come in because India has just become 20% cheaper. So a virtuous cycle of growth will be kickstarted and the way to do that is a devaluation and the question is will this government do it?
I am absolutely clear they will not do it because the mindset is that we desire to be strong in every aspect of governance. It is fine to be strong on terrorism than corruption but to be strong on economic policies or strong rupee, which is anyway an overvalued currency, is not necessarily a prudent situation or a prudent line of thought.
So if I were the finance minister or the prime minister, this is what I would do. You have to devalue, take it to 85, bring in capital, raise inflation, bring back inflation. The other thing is rural distress. Bringing back inflation will help because inflation is ultimately cost to the middle class which is the urban middle class and so it is a big boon to rural India which are the producers of the goods that comprise inflation basket. So, bringing back inflation will alleviate rural distress as well.
Plus devaluing the currency will give a big boost to exports and that in turn will help boost GDP growth. That is the prescription. Thank God, they are not going to listen to it but this is my line of thinking.
As an investor, you wonder what is it that you should do because you know there are other asset classes which are not performing and now neither are equities. As an equity market investor. what is the right strategy?
In equity market I do not see too much of a silver lining. I have always said I like smallcaps. I continue to find value there. That does not mean they cannot fall 20% and there is widespread strife in businesses. It will look very long to find even a single stock where you want to put some sizable money. It is a very tough environment. As for the largecaps, the less said the better. We had an extremely narrow bull market which always end badly.
I have tweeted about it in April that the election results were a red herring, they would not matter ultimately, this market was toast. We have seen some part of the toast already getting done, I do not think it is done yet because the economic numbers do not suggest any immediate recovery. If an investor stays parked in a bank that is solvent, that is that all you can chase because I do not think the average guy on the street is smart enough or equipped enough to go and find value in smallcaps and the largecaps do not look very good.
Anyway barring the insurers and the IT companies and those are okay places to be in if you are talking largecaps, otherwise it is a tough equity market environment.
How much more downside do you see to the market from these levels? Would you say lending would come back to the system at all?
No, it will not. Banks are shy of lending. I was looking at 15 sectors’ data. The only sector that is in positive growth is consumer lending. What does that tell you? It tells you that consumers are borrowing and now with the job losses etc, I cannot believe anybody in his right senses is borrowing to buy a flat screen TV. I think they are borrowing to finance their other borrowings. So the consumer liabilities are increasing.
The consumer savings data is very telling; consumer savings are at all-time low while consumer liability is at an all-time high. You have hugely wide debt equity ratio at the consumer level. We have had a huge problem in corporate balance sheets. The national balance sheet is itself is in a bit of a pickle and now the consumer which has been the bulwark of our growth story for the last several years in the GDP terms, itself is taking a hit. Corporate India does not want to borrow because it sees the consumers are going to be indebted, and thinks why will I take debt to put a capacity and try and sell my goods or my services to an indebted consumer?
The only area of financing that people want to take is equity money because that is risk free. There are no collaterals and no strings attached.
What happens to consumption? The Nifty Auto index has fallen 14% in the last two months. The BSE consumer durables, consumer discretionary indices lost 10% odd in the last two months. Would the measures announced on BS-IV, the fact that the government is looking at replacing its old fleet, bring about a miniscule bit of pop-up within autos?
Let us hope so. For the sake of India, if autos do not do well or tank, mean I do not see what else India manufactures which is of global size and scale? What other sector employs as many people? You are talking crores and crores of people directly and indirectly engaged in the auto business and if that business struggles or continues to struggle the way it is, it is going to be doomsday for any Indian manufacturing perspective because that is the only thing where India has manufactured and manufactured brilliantly,
Other things are very localised, gems, jewellery and handicrafts etc, which are very local to India but on a global size and scale only autos and auto ancillaries and if that sector hurts the way it is and you have employment distress, it is really a bad situations. So I hope whatever has been talked about works. I am not sure it will, but hey it’s a start!
Do you believe that this distress in the Maruti stock is to be bought just yet?
I always believe that either you are buying something in which there is a general uptrend which is fine or you buy something which was a falling knife and you saw a big off change in numbers. We had liked Maruti in 2008 when the numbers were terrible the only month in which they started to improve was October-November 2008 at the bottom of the recession and when we saw two months of 20-30% month on month growth.
You know you are buying something of value even when the stocks may well have run up may be 20-30%. From there, Maruti ran up 10 times. So, it is better to wait let us wait on the uptick on the numbers even if you are late by 20%, it really does not matter because you are buying something which has now started to move in the right direction.
Which way is the globe headed because you have a bird’s eye perspective on that as well. Where do you think the entire situation between US and China is going to escalate?
People keep talking about it. I do not think the US is going to hurt in any way from this and when you are a $65,000 per capita GDP country, you do not hurt that easily. You are well endowed you will manage and then people start comparing America with India and I will say boss you know you are $1,200-1,500 per capita country. Worry about yourself, do not worry about America. They have a very deep and liquid financing market.
The equity markets froze only once in the last three-four decades. After 2008, they fixed it in a fortnight and that is the kind of policy response I was talking about. In India, we work a little differently. I do not think the US is in any problem. If there is any one market which still looks very good, it is the US.
I do not see any market which rivals the US. Even FTSE and DAX have done very well. Their interest rates remain where they are and they head lower. I do not see what asset class can come and rival global equities. I am very optimistic on global equities. I see a lot of value in developed market equities.
I have bought stocks in the US which are up 15 times in the last three years. Where do you get returns of that kind in India when we are just scrapping at the bottom of a barrel? The IPO of Beyond Meat is up nine times from May. Where do you find these kind of returns? I am optimistic on the US, global equities, particularly the developed market equities because when you have such low interest rates, the only other asset class that does well is equities.
Are you not worried about the inverted US yield curve and the fact that just everyone is talking about an impending recession in the US?
I have said that there is not enough data to say that. There are not that many inverted yield curves we have seen in the last 100 years -- maybe four or five. Yes, they have portended a recession but there are too few data points and I do not like making conclusions on such few data points. So, I will hold my horses. I do not think recessions are a necessary corollary to inverted yields. I remain a little bit sceptical.