I have changed as an investor in the last 10 years: Shankar Sharma

In an interview with ET Now’s Nikunj Dalmia, Shankar Sharma, Chief Global Strategist, First Global, cautions that it is not a blowout bull market by any standards for largecaps which are unlikely to catch up with the small and midcaps. Edited excerpts

Now it is Diwali time. The common rhetoric on whatsapp this year is Diwali tip, Muhurat Stocks, Muhurat Ideas. What would be your money making idea for our viewers?

For Diwali you need money. You already made the money. Now go and spend it. Buy some mithai and all that. We will talk next Diwali.

So that is the consumption view.

Yes well we will do whatever we can do.

Looks like we are in for not only a good Diwali but the extended period after Diwali as well.

Yes markets have been good globally. Look at emerging markets, look at Brazil and others. They have been doing very well. General commodities have been good as well, crude has been very strong. Overall that tide has shifted in favour of emerging markets after nearly five years of negativity over EMs and I think the bottom got made in February this year. Since then, EMs have done quite well in dollar terms. I think there are up by about 30-35%, something like that. I do not think that is going to slacken off in hurry. Overall EMs doing well is good for India.

Do you think the long emerging market trade could last another quarter or so?

Could be even longer because it is coming out of a long bear market. When things come out of long bear markets of the kind that EMs endured from 2010 onwards till 2016, then the rally will last a while. I do not think it just peters out in a couple of quarters. So, it could be even longer than a quarter.

In next 10 days and then we know who will occupy the White House for next four years, who will be the boss of Oval office? Markets are pricing a Democrat win. Is a reversal bad news?

I do not think markets will react much to this. There might be some temporary flutter here or there but I do not think we should be too concerned about who comes to the Oval office. It looks like the Democrats are coming into it but I mean I am not expert on US politics and my view is that it is mirrored the politics in India quite accurately so in one sense I feel proud that they are mirroring what we did two years back that there has been sort of a left leaning candidate and a very right leading candidate and we have had exactly the same situation in India.

If you look at Twitter, if you look at all the kinds of messaging it has been very similar to what we saw two years back so India has led America in at least one respect and that is the whole political landscape. If you look at the debates they are very similar to what we have seen here.

So if markets fall because of the US election outcome, whatever may be the outcome, if they fall like they fell on the Brexit Day, would that be a buying moment for you?

I would think so. I do not think US presidential outcomes will determine EMs. I do not think we should make that kind of extension.

So what is the risk in the system?

Frankly, the risk is that nobody knows. We are all hoping that whatever has been done, just continue it. We do not want to analyse it. We do not want to hear that you want to exit from this. You want to unwind this easy money and we do not want to hear all this. It is what somewhat worked. Let us just continue with it but I do not think anybody has any clue.

But are markets taking implementation of GST, earnings recovery for granted because the earnings upgrade cycle has not started. We are still in a downgrade cycle, the quantum of downgrade may have got reduced, but let us be clear prices have moved up and earnings are yet to catch up.

I do not think earnings cycle is recovering at all because earnings are dominated by largecaps and I do not think largecap earnings are looking good at all. It is very, very simple. Over the last three years, everybody starts the year with 17% and it comes down to between zero and five per cent and all these analysts and strategy should be fired.

You have been a strategist?

Yes but I do not have stocks which are giving 17-18%. That is rubbish. Look at the data. If you are wrong for three years, then you have no business occupying that street. The earnings picture is looking quite, quite poor because largecaps are looking bad and I do not see earnings recovery happening at all. The only thing India has going in favour as far as largecaps are concerned are bond yields. They have crashed as we have discussed it in the last couple of years and that I think is the single biggest sort of change that I could see -- at times about 8%, now you at sub-7%. That itself is providing some level of floor to the market.

Will that make PSU banks a tactical buy?

I am not going to go out and buy banks. I mean let us be very clear about it. Many people have called the bottom. The stocks have had technically rally but I not a believer yet in these.

So when you talk about mid and small cap stocks, you have to be stock specific. Shankar Sharma has never been stock specific. He has always been a top-down guy. So what is the top-down Shankar Sharma doing?

I am not doing top-down. I do not see anything very compelling in top-down. As I said, I made some money in Brazil and all these commodity kind of companies, those were the sort of big macro trades. But they have played out. They have done very well. I do not think there is more money at least from… I mean I do not see Brazil going up another 50%.


I will talk about specific from mid and small cap stocks. You have always maintained that one should not look at India in isolation. India will do what the world will do. It will map up or down 2% or 3% here or there. One is getting a sense that in next 12 months a lot would be thrown at us whether from Fed or whether from political leaders, even from Europe. These are large ponderables which we would be discussing and debating in the next 12 months.

For the last seven, eight years since the 2008 crisis, nobody seems to have any answers to how things are going come back to normal if at all. They would come back to normal or what is the new normal. We should stop thinking that central banks know something that we do not. I think that part of the equation is quite clear that nobody really knows. So there will be many questions and I think markets will react when they come up but there will be fewer questions in emerging markets than in the developed markets. In any case, in emerging markets you have not followed the kind of hugely loose policies that the west has followed or the developed markets have followed. Most of the questions are centered towards west rather than Ems. That is what the market is distinguishing now. For a change, EMs have less questions than let us say Europe has or let us say Japan has.

I do not think Indian largecaps will catch up. You have to segment India into two different markets all together and both belong to completely different classes of equity. It is time that we recognise that India is no longer just a single market. Large caps in my view in India are more or less fatigued. I do not see where in largecaps barring the handful on the autos, etc are going to get great alpha.

Look at IT, pharma and even consumers. Everybody is struggling. So the only bright spark out there has been the few auto companies and two wheeler companies but that can drive largecaps in aggregate.

Coming down the market cap spectrum, the microcaps have seen amazing growth from 2009 and even in the last couple of years. So my view is largecaps in India are going to disappoint, but the action has been in smallcaps and I continue to believe that that is the area where that segment of the market will do the best in the world and it has been doing phenomenally well as well. So I am not a believer in largecaps.

And that seems to be global phenomenon. If I look at the Russell Index, if I compare the S&P versus Dow, the broader you go, the better you do.

Yes. It is not true for the commodity driven markets but it is true for markets where there is a large population of smallcap companies. The US is very similar to India in that it has a large population of smallcap companies and it has a large overall listed company base. What has happened is in this entire turmoil around 2008 and onwards, large companies have not been able to figure out how they to out of the problems. Smaller companies have been able to figure some element of the game out and that is why you are seeing money coming into small caps and I continue to believe there are great, great opportunities.

The challenge history with small and midcap companies has been that they start off well but they struggle to scale up. That has been the case with IT, pharma, engineering companies as well. For this year and next year you can talk about a rosy picture for midcaps but when they start reaching a minimum hurdle, a minimum size, they tend to flatten out.

And that is true for everybody. That is also true for your net worth, that is true for mankind. Everything will reach a point when you age and are not that nimble anymore. That is true for companies also. That is true for smallcaps and largecaps. Whatever it is, it will be a while before they reach there. I do not think they will suddenly become large companies in one year’s time, at least not in India. India has actually zero tech companies. Our companies are mostly old economy or oil economy and I do not think e-commerce is new economy because it is still ultimately a very old business. These companies take time to go from zero to hundred and like a pure tech play or a social media platform which can go from anything to anything in matter of a few quarters. We do not have those kinds of plays. So to that extent, the fall is also a little slower. The age itself also does not catch up immediately. I mean you can see age having caught up with a number of the big tech listings in the US already, the time they list actually they have already been fully priced. India I think is still a long way from reaching that position.


We have debated and argued in the past that central bankers are running out of options. We know that the effective rate cut is not making the markets happy. In fact, markets now do not even react to some of the rate cut announcements or quantitative easing announcement. What could be that trigger that could take asset prices higher?

The only trigger is the fact that there are no options for investors worldwide to go and put their money and hope to get a measly return. With interest rates being near zero, it is a pure straightforward thing that money will move out of fixed income and into equities and that has been the reason why you have seen equities do well despite things not changing much fundamentally for equities. Simply a zero interest rate option that you have versus that equity might give you 4-5% a little bit more than that I think people are being forced to compel to take excess of risk.


IT is where the debate is. IT is where the disruption is. These companies who always claim that look we have got a secret potion which is fountain of youth, are now admitting that they will also slowdown. Growth from late teens has come down to single digit and now they openly talking about more pain is about to come.

I do not think the pain has come yet. Look, these are very large companies. If they are slowing down from mid-teens to single digit, I do not think that is doomsday. The real doomsday I hope it does not happen to IT as it has been very central to the new India, the new consumption, the pool of talent it sucked up and who made a lot of wealth for them, give them good life styles. It drove the consumption boom, eating out, cafés, cars, everything. So it is not just about a single industry, I think IT re-shaped the modern India 20 years back. So I as an Indian do not feel too happy about this but I as human being understand that people age, people slow down and I think they are hitting that kind of point. The fear I have is that unless they figure out a way out of this, I do not think this low-single digit or the mid-single digit is the final point of stopping.

You actually expect the IT companies to contract?

I am not saying I expect it. I am saying that would be a real dooms day situation and I hope our management are smart enough to figure the way out. I do believe we have very good management in these IT companies. So for one, I am not making a case that they are poor management. I think by and large our mainland IT companies have great managements. But you are being faced with a hugely disruptive tech landscape and they are very large companies for them to think their way out of this will be a severe challenge for sure.

Will your midcap argument exist in IT or for midcap IT, it is a dangerous terrain?

That does not extend to midcap IT unless somebody has a particular product or particular niche. When things turn bad for the large guys, I think it will turn slowish for the small guys as well. So I think as a pack there is a problem.

And I can extend that with midcap pharma as well because if the large guys are feeling the heat of US FDA, regulation and pricing challenge would hit midcap pharma more.

My view is – Indian pharma has a lot to blame itself for, I mean that is fact. Unlike IT which… things can get disrupted. Facebook may not exist tomorrow. Something else will come up. You cannot keep on outthinking every new disruption that is not possible. Nobody has ever managed that. So I do not blame the IT guys for not having seen cloud and all that. It is not a bad situation.

As bad a situation as the pharma finds itself in terms of management quality, people have played fast and loose with the FDA. I mean this is not the way to run a quality operation supplying to customers in the most lucrative market in the world and then you have the kind of practices that we all know of. So I think they brought it on themselves.

So the pain is here to stay?

I do not think it is here to stay because there are still significant companies. I do not think US FDA will do anything very drastic. I think it is more rap on the knuckles and some fines and penalties and life will go back to normal. More important is that reputation has been dented and that is the real problem. When somebody is going to put some medicine in the mouth and you have some doubts about the veracity and the legitimacy of that, that is severe reputational damage.

We have seen a big uptick even in midcap financials and largely NBFCs. Bajaj Finance now has a market capitalisation of Rs 50,000-60,000 crore which I have been told is highest market cap in the PSU banking space. Is that a hunting ground for you – midcap NBFCs, midcap financials?

No. I am sitting out that boom and I am not a big believer in credit-led businesses.

Even though if it is consumer lend?

My belief is and by the way I mean that brings me to the other aspect. In otherwise pretty gloomy scenario for consumption, I do not see how lending can keep increasing two consumers at this space. So I am sure a lot of irresponsible lending is happening. But the thing is with NBFCs or credit-led finance in general is that profits have front ended, their losses are back ended. So all the so called paap that many of the players would be doing will not show up for the next couple of years. They might show up two-three years from now.

It is like saying buying PSU banks in the 2003-2008 credit cycle?

Exactly. So now you are paying for that, correct. That time they were all rocking, so the profits are front ended and in the next couple of years look very good for this industry and I think you want to play that momentum, by all means do it.

So if midcap pharma is out of the equation, you do not like banks, you have never liked banks in the past, midcap is out of the equation, so then what do you like within midcap?

There are lot of companies. Infra is very good. Chemicals is good. There are odd companies which do not fall into any sectors and midcaps and small caps, there are plenty of companies out there to be honest with you and frankly, the bigger problem in investing in many of them is simply that there is no liquidity to invest in them. I find many good companies which are trading 2000 shares a day and it is impossible to get into those companies but there are quite a lot of them out there, trust me.


But if this one largecap stock which you think is still looking reasonable may be markets are missing on the earnings recovery or may be markets are not realising the value of their franchise which is that large cap?

I like Zee Telefilms and that has done very, very well because for a long time it was kind of underappreciated but I think what Subhash Chandra has done in a lot of senses it is almost like the IndiGo equivalent in the media space where people have been struggling but in particularly the electronic media part. We all know it has been a big-big challenge but they have managed to re-invent themselves and it is a pretty global company now and the stock is now beginning to reflect that. So I have like that, now that does not fit into any broad because media itself is a very small sector in India and particularly in the listed space. So those kind of odd ball plays in large caps we have found but I cannot find anything which is so deeply undervalued and the market is missing a big recovery.

Even Tata Motors at 500.

I think it is good.

We have discussed United Spirits in the past and against expectations, despite the Diageo takeover, the stock is available at a price where it is lower than Diageo open offer. We have discussed this one in the past. Is there money to be made in liquor stocks, especially United Spirits?

That I do not know because my real fear is this whole liquor ban thing and when people say it does not matter or it would not happen and all that but I am not so sure of that and there will be around 2018-2019 many states will go to elections because they get bunched around the Lok Sabha time. So you never know how many more states jump on to this bandwagon and whether it translates into real sales hit, we do not know but the sentiment gets hit and I think that is one of the reasons why the stock is not doing well.

If I talk of the big picture for metals, the big picture is therefore like China is slowing down, their surplus capacity in the world in the every major commodity and demand is going to be low. But despite this common consensus view, metal stocks and metal prices they both have done very well from the recent low.

Yes that is the way markets are. Everybody had a view, everybody was right on that view for couple of years. One fine day, that view does not work. So it stopped working. I do not think metals are bad now. I have been bullish on it all year.

February we had interaction and you said buy metals.

Correct. Exactly so stocks have done well and I think it was excessive pessimism. I think with some degree of recovery in emerging markets, the sentiment for metal commodities is generally more positive than it has been in the last five years. It may well be only a technical move. I do not think there is a big resurgence in their demand but I think at the margin, things are not that bad and when you have beaten down 80% in commodities, then all you need is just a lessening of pessimism, a lessening of the bad. You do not need actually real good news you just lessening of the gloom which is enough for you to make 100%.

So awful has become bad but awful has not become great.

You do not need that. You know it would become great to make serious money.

So what is awful and where awful could become bad?

In my view, what is not awful yet but could become awful are some of our large caps, were clearly fatigued and I think there is a whole churn that is going to happen over the next four-five years when many will move out and many new sectors and new companies will come in and that transition is always painful.

It has been 30 years for the Sensex and you are an old timer. You track Sensex more than the Nifty. Only six companies in the Sensex have survived. So if you have to let us say talk about what the Sensex could be or the Nifty could be in 2020 or 2021, how do you think the picture would change because that is a more pertinent question?

I am still thinking about it I do not have an answer yet but yes obviously we are at a point where two major sectors are getting fatigued and even the consumer space is not looking too hot right now. So we will see, we will work on this theme.

So you feel that we are in for good days but this is not like a blow out bull market which we could be staring at?

I do not think it is a blowout bull market by any standards for large caps. I think there is a very strong bull market for small and midcap companies but I think there is a big overall bull market for emerging markets.

Do you see serious money also flowing back to emerging markets in the wake of a Fed rate hike or in the wake of what is going on with other economies?

It is already flowing.

It is not large, it started…

But that is a point that it does not have to become large from day one. People are still nervous, people are still tentative. Nothing will start as a deluge, it will start as a small trickle but at least the trickle has come after four-five years and at least two years of abysmal flows in EM. So the tide has started to turn and it will take a while to get in and gather momentum. I have talked to many people who are still sceptical about Brazil, Russia, about oil. That is good because that will keep this market afloat. So it will be a while before big money comes but I can see the trend coming back to EMs in money flows as well.

But India is more like a crowded trade both from an MSCI benchmarking purposes which is absolute. If I look at the relative also, we have got solid inflows and most of the global funds either are overweight India or extremely overweight India.

Which is fine, which is a sensible strategy. The problem with them is that they have been underweight. The market that have done very well, the oil centric markets. Brazil has 5% weight in the MSCI and most people were like 1% or 0.5, 1.5% and the market is up nearly so almost doubled now in dollar terms. So when you miss out a 100% in five-six months time that is painful and that 5% index weight that is not small. So by being underweight by 4% and the market has doubled, you have given up like virtually 7-8% in performance. People are still recovering from that kind of hit.

Every investor or every trader has a niche. Like Buffett is known for buying consumer monopolies. Soros is known for the man who rouged Bank of England. What do you think is that unique way in which Shankar Sharma approaches the market?

I have nothing unique. Look I am not going to die one day and expect people to remember me after the day I am died. So I have no visions of gradient. My point is as long as you are around, you have to figure out something different. So I do top-down. I do bottom-up. My view is if you want to be a batsman in cricket, you will have to be able to play all the strokes. You cannot say that I can play only the off drive and not the square cut. So I like to play all the shots.

But if you have to hit a century, you have to plan the game in advance.

Correct.

So how are you planning the next one year or financial savings or investing?

As I have said many times, the bulk of my money is in fixed income. The risk capital part is in equities which is itself quite substantial but the fact is that I am seeing a lot of opportunities even now in the smaller companies, lots and lots of them.

Buffett says that there are two things which get better with age – serious investing and wine. So I would not talk about your wine antiques but let us talk about the way you have changes as an investor. In last 10 years, how has Shankar Sharma changed?

You have to change. One thing that has definitely changed is that after the 2009 crisis, 2008 crisis, what I could not foresee was how low rates could go because we had never seen that era. So when the cuts happened, I never thought we would see zero and which actually made me sit out some part of the rally that happened subsequently because I never thought that we would ever see a world wherein, forget zero going to negative and I look back and I say maybe that should have been the call to have ki look there is no way out of this except lower and lower and lower interest rates because this problem is not going away. It is a structural problem. Maybe one should have been bold enough to have seen that and played equities accordingly with far greater aggression than what I did.

We tend to talk about numbers. You and me have both enjoyed watching Wall Street One and Wall Street Two. The famous line of Gordon Gekko in Wall Street One was that every man has a number, everyman on Wall Street is chasing a number. So is there a number you are chasing in your life?

We all are.

What is your number?

I will tell you when I get there.