Market is silent to positive cues; Don’t force it to speak: Shankar Sharma, First Global

The coalition government can be a knee jerk for the market unless it has discounted the election results, says Shankar Sharma, Chairman, First Global in an exclusive interview with Anil Singhvi, Managing Director, Zee Business. Sharma says that the market is not in a mood to react to good cues, which means there is a slowdown. Edited Excerpts:

Q: It has been almost two weeks that the Indian markets have shown a reverse trend to the global markets, which has moved in a positive direction. What can be the reason for this movement?
A: Two weeks only. It has been reminding me a song since January 2018 and the song is “राही मनवा दुःख की चिंता क्यो सताती हैं, दुःख तो अपना साथी हैं” (Why he is worried about the sorrow, sadness is a part and parcel of life). It has been almost 14 months since when we are carrying the pain and it doesn’t seem that this smog that is spread over the market will end in at least the next 2 months. A few days back I tweeted “The only thing that's certain (these days) is: death, taxes...and that Indian markets will be Red when you open your trading screen”. 

Thus, the Indian market is behaving opposite to its character. Normally, the Indian market corrects itself when the global market is in problem and balances itself when the other markets are behaving normally. In fact, it has a long history of being an outperforming market. It doesn’t go so volatile like other emerging markets on the name of oil and metals. India is generally a stable market. 

I have been in the market for last 35years and during this stay, I have seen that the market shows a straight line of the side that this is going to happen, i.e., it will be bullish or bearish. But, this time there is no clarity on how the market will sit. It seems that the pollution levels, at the corporate and political levels, have reached a mark that you can’t see anything beyond 10 meters. The pollution has narrowed our view as one there was a feeling that the crude can go down to $10/barrel levels then it seemed that it can reach the mark of $100/barrel and then it gave a feeling that it will get fixed at around $50/barrel, but it never happened. It doesn’t stay at a level. Every week it shows a different move.  

When it comes to the Indian market then there was a time, when the Assembly results were announced, that every problem has been sorted out and now it will start behaving in a positive manner. The assembly results brought a strong rally in November-December 2018, but the rally was reversed in January-February 2019. In which the small-cap index has returned after reaching to a certain level. So, I think this is an effect of pollution. 

Q: So, how one should look at the market?
A: It seems that there is a similarity between the 2008 slowdown and the ongoing problems of the market. In fact, an artificial/spurious touch has been adorned to the top Nifty, where 4-5 stocks are holding the indices at the current levels. On looking beyond these stocks you will get to know that they have fallen to the levels of 2008, in terms of percentage not the stock price level. Several stocks have fallen by 70-80%. Interestingly, the 2008 slowdown can be treated as a fast-forwarded movie that was forgotten after a year of its existence. But, this time, it is dripping like a slow-poison and running long. However, it is not so long as it has been 12-13 months only, but it reminds me a statement made by Late Pramod Mahajan, “अगर पावर में रहो, तो 5 साल कैसे गुजरते हैं ये पता नहीं चलता, पर पावर के बहार रहो, तो 5 साल से ज्यादा लम्बा कोई वक़्त हो नहीं सकता है” (You never know how five-years have crossed when you are in power, but it turns up to pass the same time when you are out of power). Same happens in case of market, “तेज़ी के 4-5 साल तो बहुत आराम से निकल जाते हैं पर मंदी के 12 महीने नहीं झेले जाते हैं” (You are at an ease when the market remains bullish for 4-5 years but can’t afford a bearishness of 12 months). 

Q: Do you think that this is the right time to invest in mid-cap and small caps shares? 
A: I am very clear on it and have also seen the results of this quarter and previous 2-4 quarters. In fact, the companies tracked by me have posted good numbers but there is a slight difference that that market is not giving a desirable value or valuation expansion to those stocks. This has led to an increase in EPS of the stocks, but the price has remained at the same levels. At least, good stocks of the small caps have not lost a lot or have gone down by nearly 10-20% but in case of multiple who stood at 15 times has been reduced to 5 times. It is an understandable fact, that multiples can’t be brought down to 0 levels as long as there is a reasonable cushion or visibility of numbers. But, no one can predict the timeline for it, but it will occur as the market will wake up and provide 15 Price-to-Earnings (P/E) to 5P/E and 40P/E to 15P/E. This is a rule of the market, but one can’t provide a timeline for that, but it will happen, and I have no doubt about it. 

Q: The answer to this when it will happen will be decided after the elections are over?
A: Even, I can’t say anything on this. There is one thing in this market which talks about before or after because the market means a surprise. A consensus has been created that nothing can be done before the elections, but the market can surprise us, but we don’t know when. I have said that the fog or pollution is too dense that there is no clarity that it will happen pre or post the elections.  

Q: This is the first time that you are not able to make a clear view of the market? 
A: Am unable to make it. And, I have learning that never force the market to reply. It is not an interrogation, where it is being forced to sit and reply to the questions. Allow it to sit in peace as there will be a time, when it will speak and let you know in its own voice but when no one knows it. You will have to be patient as the market is not saying anything at least into my ears. I am being patient that is a thing that sometimes you do nothing. 

Q: Everyone in the market has a question, whether there is something that is safe here as single news can pull down shares of big to small companies by 25-50%. What is happening in the market and how an investor can protect himself in this market?

A: I have a simple answer for it that these things occur during a slowdown and I have always said that a slowdown (recession) is a very good disinfected, it is a Dettol. Let, the slowdown prevails as it will bring out several things. 

Stock prices climb when the market is bullish, and this bullishness helps the companies to raise good loans on it and make more pledges. There are people who even manipulate their earnings, which benefits them. They adopt fraud mechanisms to show profits and the market provides high-multiples on the same. They reap the benefit of these multiples to pledge more. In fact, it creates an atmosphere where good and bad things happen, but bad things remain covered. And, these slowdowns of 12 months are needed to uncover the wrongs when they are asked to repay the pledges or are supposed to pay the interest on the loans or close it but the stock prices don’t stand at the same levels. Slowdown helps in uncovering such things. And, history has such examples. For instance, Harshad’s problem didn’t come into light till 1992 till everything was going fine. But, a sudden decline of the market brought the issue in light and turned the cycle. Yes, it is a worrisome situation. 

Few days have passed when I was sitting with a friend and looking on the stocks, group by group, and were not able to find a solidity or something concrete. If not, today, then maybe it will happen tomorrow. We always knew that certain stocks are hollow and have turned up to be a zombie. It was a matter of time but there are many that have reached to the verge although we never thought that they will reach there. There are several strong stocks, who can join the list tomorrow. So, barring 2-4 groups like Bajaj Group, particularly in the Auto segment and I am not aware of the finance sector as I am not quite confident about the section. Apart from this, the three to five IT companies with good cash flow and do not have debts will not turn up to be a bankrupt company may they can’t report any growth in their earnings. It is a desert and you will not be able to find anything in the space. 

Q: Thus, it is a perfect time for big players like Shankar Sharma to make money from the market?
A: Yesterday, a friend called me saying, Shankar, its time when we can earn, and I said maybe it is a time for you, as I have retired from it. But I would like to say that the situation is worrisome and has been the same for the last 6-8 months. I feel, it is a manifestation of a slowdown and everything is suggesting that you are out of cash at the time and are not able to repay your loans. Thus, this is a sign of recession and problems will be solved as soon as the recession comes to an end. 

Q: Do you think that the market has no clarity on the election and its outcome, if yes, then what can be its outcome?
A: See, consensus and opinion polls are out. I think that it is a matter of common sense that BJP is not going to get a similar number of seats as it won in the previous elections. Different opinion polls suggest that the party may fall short by 30 to 150 seats, but no one knows what will happen. Ultimately, I think that elections are nothing but arithmetic where coalition with any party will improve your chances to be in power. Thus, the time has changed, and it is not a game of a party and a person. Basically, it has become a game of arithmetic and we have seen that both parties are making efforts to form coalitions like BJP has made a coalition with Shiv Sena although they didn’t share a pleasant relationship for past two years. It has also formed a coalition with AIADMK. Similarly, Congress will form a coalition with DMK. In fact, the moves of Chess have been enacted and considering this, I feel, that no party will get a clear mandate.

If this happens, the market will feel it as a knee-jerk for itself, unless the scenario is that the market hasn’t discounted the elections results. Everyone knows that it is not going to be a majority government, that is, they are going to have a coalition government and that’s why the market may discount that scenario to ensure that the scenario is bottomed before it occurs. 
It is a complicated question and if you want to know what is going to happen then I will say that it will be a coalition government. Who makes it? That is an open question. 

Q: I would like to get your opinion on Crude as you are someone who has a perfect view on crude and its situations?
A: But, it has not been perfect for last 6 months as it was at $50 when we had a talk last time then it went up to $70-75 and has returned to $50 levels once again. Usually, I have a view on crude but there is an element of mist that is not allowing me to predict its movement. The safest option is that it should stay where it is standing at present, but I don’t have any clear answer about its movement. 

Q: What are your opinion on China, the US and trade war and other global challenges? Should we forget it, or it may be a spoiler in times to come?
A: I feel that the emerging markets are too bullish. I think that China has created a bottom for itself, thus its market will do well. Brazil and Russia are also doing well. Unfortunately, India that has always been the best in the group of four has failed to do so. This is a matter of concern, but I can’t see any problem in three markets of the BRIC nation. In addition, the US market is doing good and has bounced back from the crash that it saw in the month of December. 

Q: In the last interview, you said that interest rates can be a gamechanger. Bullishness can be seen if the rates are slashed and it has happened, and inflations are also down but the market hasn’t reacted to that.
A: Not only that. Even crude has gone down from $75 to $50 but the market hasn’t reacted to it. These signals, where the market is reacting negatively to the positive news, hints that there is a slowdown. In fact, the market went down on the day and the second day when the rate cuts were announced. Apart from that, the crude has also got down by 30% but the currency hasn’t gone down. If we say that the currency has gone down due to the upward movement of the crude, from $40-45 to $75 than it should bounce back to at least 68-69 when the crude has returned to its previous levels. But, it is stubbornly high yet. So, the worrisome part is that the market is ignoring the positive cues. Thus, means that the market is in a different mood, where it is not interested to react/hear anything. Now, the question is how long the market will be in this mood. But, this is a sign that the market is not feeling good about itself. 

Q: You were saying that you have retired but how the lion can stop hunting?
A:  Retirement means I don’t want to involve myself in trading as I can’t see something useful in it at this age. 

Q: What has changed on part of Shankar Sharma, in terms of work?
A: Almost everything has changed. 

Q: Like. 
A: I used to be a trader but now have changed into buying and hold. There is a shift from large cap to small cap. Earlier, I used to play in the global macro segment but now have shifted into the local macro. 

Q: Is it due to the relocation from Mumbai to Dubai?
A: No, not at all. 

Q: Than why so? 
A: Mirza Ghalib once said, “ख्याल ही तो है, बदल भी सकता है” (It is just a thought, and can change). Thus, it was a thought and have changed by now. A person must change with age. Investing is a personal journey and, in the way, several things that used to be difficult has eased off while those which were easy has turned up be a difficult one. So, trading is one such thing that has turned up to be a difficult one for me, now. 

Q: What is your suggestion for small investors who follow you, but are planning to move out from SIP due to fear?
A: The problem is not in SIP. I think the problem lies in debt products which were bought with a hope that they are a fixed deposit (FD) account. And, it is a worrisome fact that these accounts were bought with a hope that they can also get steroids along with the fixed deposit (additional benefits with the FD). But, the truth is that it was not a fixed deposit, but it is just a juice and they will earn it only if they, the company, are getting it. 

Q: Do you feel that the market may see a major fall before the election?
A: Yes, there is a risk and the market are saying it loudly by not reacting to the good news, rate cuts, low inflation levels, fall in crude prices, good GDP numbers as well as when some of the corporate numbers are Okay. Then what it is saying? It is saying that I am not in a mood to listen or to do something big. 

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Q: Shankar Sharma is fully invested at present or not?
A: yes, fully invested.