The stock markets are living in extraordinary times. During the past two years, the indices made headlines for all reasons right and wrong. The Sensex made a historic high of 21,000 in January 2008 then pummeled all the way to 8,000 levels in nine months flat — in October 2008. Between March and May, it again made headlines for almost doubling from its lows, a breath-taking move that included a momentous upper circuit-locking move for the first time in history.
Is the vicious bear market over? Are we in a bull market? Shankar Sharma, Managing Director of First Global — one of the few analysts who timed the market better than most in 2008 — said the rally may come to an end with a few weeks’ time or a month or two. “I suspect we continue for about a month but globally there are enough fault-lines appearing in this rally. So the reverse of green shoots is probably beginning to appear in the form of rising bond yields and in the form of economic data still not being uniformly robust,” Sharma said in an exclusive interview with CNBC-TV18.
The best trade from hereon would be the metal and oil space, Sharma said. “The best trade globally right now is the commodity space, which is the industrial metals space. For oil, we have been bullish from about the early USD 50 per barrel range,” he said.
“The other aspect is the weakness of the dollar,” he said. “In the short run, the weakness of the US dollar is great news for EMs both in terms of liquidity as well as inflating the price of their natural resources. There are very many places in this market which are resources companies: Reliance is a quasi-resource company as are the Tata Steels, Hindalcos of the world. You can play the same trade in India, the tape is telling very clearly that the metal space is the one that will outperform for a reasonable while to come. Now, I am talking about weeks and not really months but weeks are good enough to make money in the markets.”
Q: Is the bear market over, you think?
Sharma: I don’t want it to get over ever because in a bear market we make 100% in two months, which is impossible to make even in a year in a bull market. Why on earth would we want this bear market to get over? This is terrific and amazing — we see industrial production come in at 1.4% and that’s an amazingly high number in context of the -1% etc that we were running at. So we want the bear market to continue because we can make money lot faster and quicker and a lot more easily than in a bull market.
Q: Do you think a durable uptrend has started despite the moves of the last few weeks?
Sharma: Go back last year, when we were genuinely very bearish and I do remember having expressed a certain notion that there was one big rally in this market which would take us close to the highs — 16,000-18,000, something like that. That was probably after the October meltdown had happened. The fact that we are in one shouldn’t surprise us, but the fact that it has done it so quickly is a matter of surprise without any doubt. However, given the magnitude of the fall last year, there was one huge rally in the market and that’s exactly what we are seeing just now.
Going back to 2007 I was a fearless bull, and in 2008 I was a fearless bear. January-February-March 2009 I was a fearful bear and now I am a fearful bull — that’s the evolution.
We have played the markets reasonably well over the last four weeks but particularly post elections because to our mind being cued prior to the elections was fraught with danger — because just as we saw a limit-up day you could have easily seen two limit-down days had something like Mayawati come to the Centre etc. So there is no point in being extra smart in markets, sometimes you just let the first move happen and wait for a reasonable amount of clarity to happen and that big risk got taken out on May 18. Since then, our view has been that we are going to see strong uptrend particularly in the second-liners. That’s precisely the way we have seen the markets play out. I suspect we continue for about a month but globally there are enough fault-lines appearing in this rally — and any reasonable analyst must take note of those factors, just as reasonable analysts should have taken note of the green shoots in February, March or April.
So the reverse of green shoots — I don’t know what the word would be for that — is probably beginning to appear in the form of rising bond yields and in the form of economic data still not being uniformly robust. However, commodity data and commodity prices being extremely robust can probably lead to a similar situation to what we saw in the middle of last year — May-June-July — when the world was clearly slowing down but crude, copper, aluminum, commodity stocks, steel stocks were all rocking. Even inflation was doing well. And we all know how that ended. Somehow I feel we're headed in a similar direction.
Q: What about the bullish aspect of it. One month you said — you think it’s 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 this rally?
Sharma: That is the side to which I would go to: the latter in which you will not see the narrow indices — Nifty and Sensex — do very well. They will be up but they won’t be up as spectacularly as the second-line indices would. That’s pretty much the pattern we are seeing in the last four weeks or so, three weeks since the election results came in. The Sensex has not moved up as much as the second line index has, so this big disconnect in performance will continue till the Budget or a tad thereafter. However, that’s precisely what the worrisome thing is — when you see rallies of this kind to enjoy, just as we enjoyed the November 2007 rallies or the Jan-Feb 2000 rallies. We are in that situation. I don’t think it’s like doomsday just yet but I think we are getting close to that probably in about four-five weeks time.
Q: Would you be still riding it from your bullish positions or would you be slowly starting to take profits?
Sharma: Our view is that the best trade globally right now is the commodity space, which is the industrial metals space. For oil, we have been bullish from about the early USD 50 per barrel range — but remember not for any fundamental reason: we don’t think oil demand bounces back in any meaningful way for a while to come.
However, the markets are not just about fundamentals, something went from USD 150 per barrel to USD 35 per barrel, bounced back, the trend changed, you ride that trend. I have said earlier many times that we have crude and an effective way of looking at markets which is that momentum is the only thing that works perennially, valuations and fundamentals don’t necessarily work all the time. The momentum was looking very strong at USD 50–USD 55 per barrel and it still continues to look strong. We will see when that begins to slacken and that rally will still continue. So industrial metals, copper or aluminum, the rally in those will assist stocks belonging to those sectors and oil on its own, we think USD 80–USD 85 per barrel is pretty much on the cards.
The other aspect is the weakness of the dollar — the way it is behaving lately. I am not making an outright case for that but it is possible — I reckon 50:50 chances — that if the dollar makes a new low against the Euro in which case again you will see attendant issues emerging out of that which is commodity prices are very strong but inflation coming back strongly. Most importantly, US bond yields going further beyond to where they have reached. So this cookie probably can fall apart with a combination of these factors that I am outlining which I think might take a couple of months to play out or even maybe six weeks or three months to play out.
Q: So in your eyes, is it conceivable that the dollar-Euro goes to between 1.5-1.6, crude goes to USD 85/barrels in the near term, and what would that mean for emerging market (EM) equities which is the asset class which most we are concerned with?
Sharma: I have always maintained one thing which is what people kept asking me through the bear market, what would force you to change your view? What fundaments would you want to see to change your view? I said I really don’t care too much about fundamentals; the only thing I care about is the strength or the weakness of the US dollar because that determines almost everything in this world of investing. The moment you started to see that — around March-April, from 1.25-1.30 or 1.35 — momentum became strong in the fall of the US dollar versus most EM currencies and then the trade obviously changed. When the US dollar falls, EMs do well because both in terms of money flows as well in terms of inflation of basic commodities.
In the short run, the weakness of the US dollar is great news for EMs both in terms of liquidity as well as inflating the price of their natural resources, which is exactly why you’d notice last year Russia and Brazil were absolutely hot markets in the period from April till July-August — they are resource rich and do well in such situations. India is a trickier play because it is resource-deficient although there are very many places in this market which are resources companies: Reliance is a quasi-resource company as are the Tata Steels, Hindalcos of the world. You can play the same trade in India, the tape is telling very clearly that the metal space is the one that will outperform for a reasonable while to come. Now, I am talking about weeks and not really months but weeks are good enough to make money in the markets.
Q: So you are saying the favourite trade, aside of buying metals is probably still chase the Sterlite and Hindalco which haven’t topped out in the near term?
Sharma: Exactly. Our take is: there is still room in these stocks. I was telling somebody the other day: he said none of the fundamentals really support any of the trades you are recommending. I said: great, welcome to the new world of investing.
What you should do is, do your complete fundamental analysis; do it with complete objectivity and then the stocks that come out the best on those fundamentals—never buy them; stocks that come out the worst on those fundamentals, go right ahead and buy them. That’s the news paradigm, this is the new investing mantra and I don’t want to sit out of this investing mantra. I think you can play the trade and you can be reasonably nimble and get out of harm’s way. I think markets are reasonable—they give you enough chances to get out of a trade—it’s not that overnight everything collapses. There is no such thing on most cases unless there is huge catastrophe.
Q: Would you be still riding it from your bullish positions or would you be slowly starting to take profits?
Sharma: Our view is that the best trade globally right now is the commodity space, which is the industrial metals space. For oil, we have been bullish from about the early USD 50 per barrel range — but remember not for any fundamental reason: we don’t think oil demand bounces back in any meaningful way for a while to come.
However, the markets are not just about fundamentals, something went from USD 150 per barrel to USD 35 per barrel, bounced back, the trend changed, you ride that trend. I have said earlier many times that we have crude and an effective way of looking at markets which is that momentum is the only thing that works perennially, valuations and fundamentals don’t necessarily work all the time. The momentum was looking very strong at USD 50–USD 55 per barrel and it still continues to look strong. We will see when that begins to slacken and that rally will still continue. So industrial metals, copper or aluminum, the rally in those will assist stocks belonging to those sectors and oil on its own, we think USD 80–USD 85 per barrel is pretty much on the cards.
The other aspect is the weakness of the dollar — the way it is behaving lately. I am not making an outright case for that but it is possible — I reckon 50:50 chances — that if the dollar makes a new low against the Euro in which case again you will see attendant issues emerging out of that which is commodity prices are very strong but inflation coming back strongly. Most importantly, US bond yields going further beyond to where they have reached. So this cookie probably can fall apart with a combination of these factors that I am outlining which I think might take a couple of months to play out or even maybe six weeks or three months to play out.
Q: So in your eyes, is it conceivable that the dollar-Euro goes to between 1.5-1.6, crude goes to USD 85/barrels in the near term, and what would that mean for emerging market (EM) equities which is the asset class which most we are concerned with?
Sharma: I have always maintained one thing which is what people kept asking me through the bear market, what would force you to change your view? What fundaments would you want to see to change your view? I said I really don’t care too much about fundamentals; the only thing I care about is the strength or the weakness of the US dollar because that determines almost everything in this world of investing. The moment you started to see that — around March-April, from 1.25-1.30 or 1.35 — momentum became strong in the fall of the US dollar versus most EM currencies and then the trade obviously changed. When the US dollar falls, EMs do well because both in terms of money flows as well in terms of inflation of basic commodities.
In the short run, the weakness of the US dollar is great news for EMs both in terms of liquidity as well as inflating the price of their natural resources, which is exactly why you’d notice last year Russia and Brazil were absolutely hot markets in the period from April till July-August — they are resource rich and do well in such situations. India is a trickier play because it is resource-deficient although there are very many places in this market which are resources companies: Reliance is a quasi-resource company as are the Tata Steels, Hindalcos of the world. You can play the same trade in India, the tape is telling very clearly that the metal space is the one that will outperform for a reasonable while to come. Now, I am talking about weeks and not really months but weeks are good enough to make money in the markets.
Q: So you are saying the favourite trade, aside of buying metals is probably still chase the Sterlite and Hindalco which haven’t topped out in the near term?
Sharma: Exactly. Our take is: there is still room in these stocks. I was telling somebody the other day: he said none of the fundamentals really support any of the trades you are recommending. I said: great, welcome to the new world of investing.
What you should do is, do your complete fundamental analysis; do it with complete objectivity and then the stocks that come out the best on those fundamentals—never buy them; stocks that come out the worst on those fundamentals, go right ahead and buy them. That’s the news paradigm, this is the new investing mantra and I don’t want to sit out of this investing mantra. I think you can play the trade and you can be reasonably nimble and get out of harm’s way. I think markets are reasonable—they give you enough chances to get out of a trade—it’s not that overnight everything collapses. There is no such thing on most cases unless there is huge catastrophe.
Q: On a bubble meter — if I can coin that phrase — if 2007 was 9, what have the last three months been. What would the reading be?
Sharma: It’s not a bubble. Put it in context: we had a huge deflation of equity prices last year. We are seeing little bit of an inflation of equity prices this year. Even after having run-up so much, a lot of stocks are still off significantly from their peaks, which only tells you that how big the old bubble was — that even after having had such a strong run, look at so many stocks and the peak is a huge distance away. It is like running a marathon and saying: "I have come a long way", and then you look at the distance and it's just 10 miles. So, it is something of that kind that you are still a fair distance away. I don’t think this is a huge bubble. But yes, given the compression of timeframe of this move, one could argue that it is a garden variety bubble, if you will.
Q: Let me present this scenario to you, which is different from what you are suggesting and see what probability you attach to that—the market corrects but then consolidates between 12,500-15,000 for few weeks, which is just maybe 15-20% lower from here and then eventually, over the next six months, goes on to make a new high, which is more than 21,000?
Sharma: Absolutely possible. I have been around too long to say that it’s not possible, that it cannot happen. I would even go to the extent of saying that Jeremy Grantham (veteran investor and founder of GMO) wrote an interesting thing and which is that the amount of money that has been thrown at the so-called problem that may or may not move the GDP but that’s enough to move stock market. That is because, in a stock market, it's barely 30 stocks you need to move for the market to look extremely good. That’s probably what the phenomenon is across the world, particularly in emerging markets, given the fact that the dollar does look extremely weak in the short run. There is nothing to suggest that why we can’t get at least close to the highs if not absolutely make a new high — whether we sustain those highs or not, that’s another matter but you have a fair shot at it now. It can’t be ruled out.
Q: What is a more likely outcome in the foreseeable future as you see it, not 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 mini bull markets and mini bear markets over the next couple of years –six months each even?
Sharma: It will be like navigating your way through molasses. Go back to October last year – we had a 30% down month. Any bear thinking that November would follow was mistaken – you could have bet on a 5% down month or an 8% down month but not a repetition of a 30% down month. So flip it around this time – May was an extraordinary month. Don’t bet on repeats of those things happening. We will need to settle down to a more gradual pace of rise and a faster pace of declines as mirror opposite to what happened in the period November to March when the declines kind of stopped getting that severe and the rallies were fairly sharp. We would probably see the reverse of that happening that the declines become quite sharp, the rallies become little bit weaker because we have already put in a close to 100% under our belt. So much as the goldilocks thing would be desired by all of us. I doubt if it’s going to be that simple that everything is forgotten and we are all friends again — bull and bear — and life goes on.
I think the challenges are still there; momentum is strong, we play the momentum game, we think we can see when the momentum ends and we think we can exit before the momentum goes out of this mini bull market, if you will. But to expect that the next three months will be as easy as May was? I think that’s being optimistic being a bull. If you were a bear in November and to think that you would make another 30% back-to-back returns on top of what you made in October, that was being optimistic too.
Q: What would you look at as a first warning sign of flagging momentum? Of course the market will move sharply maybe but in advance would you look at either the price of crude or dollar-euro or anything which can tell you that the music is beginning to fadeout?
Sharma: When global equity start to underperform global commodities that’s the first sign that I would want to watch out for because normally the twin should go in the same direction by and large. When the two begin to diverge and you can see a bit of divergence creeping in, you are seeing markets like China – India is belonging to a different planet presently and it’s on a nice high so exclude India from the basket just now – other markets have been a little bit of a struggle whilst crude has been on an absolute fire, commodities, industrial commodities have been doing well. Gold, of course, doesn’t belong to the same camp but that had an okay run from USD 880 per ounce to USD 950-960 per ounce.
That disconnect is what I would watch out first and foremost and I think you are seeing very early signs of that disconnect beginning that global equities are beginning to struggle, global commodities are rocking. I am not saying it will be an exact repeat because markets don’t normally repeat the same script that quickly but I am just saying, make sense to be cognizant of what happened in May-June-July-August 2008 – a similar situation happened. I am saying that’s the one thing I would watch out for.
Q: You started the discussion by saying you still see the broader market outperforming. Do you think that midcap have not caught up enough or because of the fact that they are still so much blow their 2007-2008 highs that they can carry on for a bit longer.
Sharma: For a bit longer. I think if we just look at the highs of most midcap names including even some largecap names there like I said not even in striking distance of their highs. Given that amount of room on the upside there is nothing to say why they can’t be up 20-30-40% in a very quick span of time. Like I said Suzlon on a good week puts on 40% so why even talk of weeks where you can do that in a few days.
Q: You described yourself as a fearful bull at this point is the accent on the bull or on the fear?
Sharma: It’s an oxymoron, right? Bulls are not supposed to be fearful; bears are supposed to be fearful because the tide is always against them. I think I am fearful. You can place equal weights on both. When I talk to folks and I tell them that you should go out and buy all these rubbish companies and they say what has happened to you? What are you saying? And I say, yes, you have to lose it if you have to make money in this market because if you had bought NTPC over Reliance Power, you were the biggest fool in the world. You have to go out there and buy companies which have greater promise of the future but less promise in the present and that is the trade we are on. When you are on a trade like that, you have to be fearful.
I am not a kid out of school who starts to believe the the goodness of markets is to make everybody rich. It is not my perspective on markets. The markets are meant to make everybody poor and only a small percentage rich. I want to belong to that small percentage. Hopefully my clients also want to belong there as well. That is why I am fearful. The kind of stocks that are going up — and not the stocks that ordinarily — would not make you sleep peacefully at night, but, that said, markets do not turn to suit your own investing philosophies, you have to turn your investment philosophies to suit what the market is asking you to do at that point in time. That’s what momentum investing is all about.
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