Shankar Sharma speaks at DNA....

The big bear hates commodity bull runs because, unlike other asset classes, it impoverishes people. So they don’t last. And he continues to be bearish. The Sensex, he says, is just a two square mile phenomenon — Fort to Nariman Point. The market going up benefits 25 brokers, 200 promoters and 100 funds. Iske aage kisko fayeda ho raha hai, boss? he asks. Meet Shankar Sharma, director and chief global strategist, First Global Stock Broking. In this freewheeling interview, he spoke to DNA Money of how China is 200 years ahead of India, how India doesn’t deserve to be a Bric nation, on how the market is all about insider trading:



How do you see 2010 panning out?
Back in December 2008, my view was that in 2009 could not by any logical measure be a down-year considering that we had already lost 60% in 2008, which was unprecedented. That panned out but within that, my view always was that it was a bear-market rally and not the emergence of a new bull market and I’ll still pretty much maintain that view till I find evidence to the contrary.
 
But what about 2010?

My view has been that we will see a market in the first half which will be quite ugly. The first half would be a down-half and the second would be an up-half but by and large, for the year, we may not see much of a huge swing as opposed to 2007, 2008 and 2009, which have been very huge by way of volatility. I doubt if this year will be as violent as the years past because volatility cannot continue with the same intensity perennially.


What about the impact of FII flows?
I don’t believe that money flows have anything to do with the market. So I don’t subscribe to that theory that flows determine where the markets go. The rationalist in me, the mathematician in me, tells me only one thing — that dollar in is always equal to dollar out. There can never be new money coming into the market, it is arithmetically impossible.
So we chose to focus on the side of the equation that supports the market move. If the markets rally and the FIIs bought stocks worth a thousand crores, we kind of work in reverse and say that because they bought the market went up.
I say what about the guys who sold a thousand crores? For FIIs to have bought a thousand crores, somebody sold a thousand crores.

So how come we are not focusing on that side of the equation?
Because that’s not comfortable. We like to see easy patterns in things, that’s the way the human mind is. Sometimes patterns are easy and they sort of lull us into … Five days on which the FIIs bought, the markets went up so we kind of assume that that is the pattern. If you drill down, there is no pattern at all. The mind wants to seek a pattern in things that show no patterns at all. That’s the way the human mind works. We like easy theories, we like things we can tell our children. And I always say that if this was that simple, then my daughter, who is five, can be an analyst. If all that matters is that money came in, markets went up, and money went out, markets went down, then why do we need people who are educated. Then why do we need people who are educated for a pretty childish thing to analyse? Anybody can analyse it.No flows can determine where the market is going. It’s irrelevant. The market does not know the identity of the buyer or the seller. A dollar in is equal to a dollar out. And a dollar in, irrespective of where it comes from, has the same monetary effect on the market. I can’t say that just because a foreigner is buying stock, I have to attach $1.5 of value to a $1 investment. That’s all bullshit. That’s all nice talk that people begin to talk, you know, over three drinks…

Ultimately there is no rational basis for saying these things. But in life there are a lot of things which we kind of just believe, that’s the way it is. Rationalists always debunk these theories. I belong to that camp. I believe in a lot of nonsense also but I don’t believe this nonsense.


What is the rationalist’s view of the markets?
My views are determined by 60% technical analysis and 40% by fundamentals. Money flows don’t matter, because arithmetically money flows cannot matter. Dollar in is always equal to dollar out.
I’ll tell you where it matters. It matters in a thinly traded stock. That’s where it matters, because that guy is the market. That one guy, two guys, that cartel of people they can manipulate and take up the price of a single stock, a Z-group stock. And that happens. Even as we speak, there is some stock being manipulated, that’s possible. But I am not talking about a stock, I am talking aggregate, macro, a big market. A large, liquid well-traded market. And by category emerging markets, by category global equity markets, its not possible yaar.

When will you turn a bull?
It’s not to say that we have been bearish on all sectors. One sector which we have been very, very bullish on over the last twelve-eighteen months is auto, even during the 2008 crash. Most other sectors have favourable comparisons emanating out of a poor 2008, so 2009 makes them look good. Autos, on an absolute basis —- the numbers, profits —- take any parameter, have been good. Autos are in a secular bull market in India, without a doubt. I am not convinced about other sectors.


Why?
The top heavyweights of the Sensex are very large companies — Reliance Industries, NTPC, Bharti, RCom, SBI — and they would not be able to deliver the earnings growth needed to take the market to new highs. Broadly speaking, though not in the absolutely literal sense, we will become like the Nasdaq. That index has done nothing for ten yeas and I doubt if in my lifetime it will go to new highs. That’s because the top five stocks — Intel, Cisco, Microsoft, Dell, Oracle — are 50-60% of the weight of the index. They are not going to their highs, forget about it. They are not going up three-four times, they are large, mature companies which will grow earnings maybe 3-8%. The Nasdaq is being weighed down by the weight of these five-six biggies, but below that Apple has been terrific; Google, Amazon have been terrific. But none of them occupies a huge enough weight to influence the whole index. What you need for that to happen is the emergence of companies that become equal-weight or higher in weight than the stalwarts. Maybe it is possible in America because it is a tech-centric market and simply because of the innovation of the American people. In India there are no innovations, there are existing businesses that are growing. We don’t have a single technology company in India.


What about the telecom revolution?
Telecom was large across the world but not so here, so it had a lot to catching up to do. It was a pretty predictable road, we knew where we would end up. Maybe to 15-20% penetration from 2%. I remember when we had to make presentations to foreign institutional investors in 1994-95, India’s telecom penetration was only 2%. There were only landlines then. I couldn’t take the bet that it would become 50%, but I could definitely take the bet that we will go to 10-15% in 10 years. My belief was that every two-wheeler owner would have a mobile phone. That was the proxy on which we worked, which was actually totally wrong. That has been outstripped by a factor of 10 at least.


On Sensex, the phenomenon of a few becoming heavyweights - is there a similar example of it elsewhere, say in emerging markets?
In most emerging markets you will find that a few companies become an oversized part of the index. The reason for that is very simple. Most emerging markets have businesses that are born out of crony capitalism. A few promoters and entrepreneurs can fix the system, get large businesses and hence power gets concentrated in a few hands. So whether it is a land deal, a land contract or a gas find — whatever it is — if you and I try, even if we qualify, we will never get it. Intrinsically all these economies work on the basis of connections unlike America, which is still a highly merit-driven economy. Hence we have a very concentrated market cap in the hands of a few people who manage to get their licences and sweetheart deals.


Which sector do you think is now placed like telecom was in the mid-1990s?
Actually the strange thing is that we have been making the same presentation for the last 16 years. There is something called Indian Infrastructure that we have been presenting since 1994. The only thing I change is the date of the presentation. It is a permanent bull market story, boss. We never do any infrastructure, so it’s always in the future; the past is terrible, future is bright.


What about our execution capabilities?
Obviously, something will change — I am hopeful. The only thing I worry about is we take on the mantle of trying to do the Commonwealth Games, and we make such a mess of it. Now nobody has heard of the Commonwealth Games except the countries that were colonised, so the bad name will not spread across the world. But of the Bric pack, India is the only country that has not hosted or is even close to hosting the Olympics. Brazil is hosting the next one; China and Russia have done it already and I doubt if after the Commonwealth Games we will ever get a shot at staging the Olympics even if we could write a cheque for it. I find that we have become too self-congratulatory by way of our achievements and that is very dangerous. We have already started congratulating ourselves, merely because someone put us in a group of four countries (Bric). But I think China is 100-200 years ahead of us. The Chinese are very saddened that India and China are being spoken about in the same breath. On every parameter they are ahead of us. I mean, they have 1,300 ports and we have 13. We have managed to convince the world that we are a peer of China, and once a certain thing gets coined it’s very hard to shake it off, boss. That’s the way marketing works.

But a lot is said about India having better democratic institutions than China, which works in India’s favour in the long run...
See, India has terrific things. It has a democracy or a so-called democracy, in which I get to vote once every five years and then we can forget about democracy in the intervening four and a half years. And then we have annual accounts and quarterly accounts in English, which is very good. All those things greatly appeal to foreigners. It is a country which has built itself to attract foreign capital, in a manner of speaking. That we don’t get enough of it, I think, is a shame. My view is that we should completely unfetter foreign capital and let it flow in as much volume as it wants to, and forget about trying to use monetary tools to curb its flows. Let them come here, pump up the domestic economy, inflate to a size of a huge bubble and ultimately the bubble will pop. Who is the biggest loser when it pops? Not me, because I don’t own anything. It is largely owned by the foreigners, right? I have kept my money in the bank, so I am safe. The guy who owns the majority of the bubble is the guy who is going to lose the most. The foreigners own the majority. The bubble implodes. Markets go down. Property goes down. Cement plants go down. Value of steel plants goes down. Then, I, as a local, I will go and buy those assets, on the cheap. It is ultimately a zero-sum game. Sounds terrible. But that’s the simple arithmetic. Somebody walks in with $50 billion and leaves with $10 billion he has left $40 billion of wealth for me as an Indian. But people don’t get this. If I say this to somebody they get very offended and tell me how can you say that they will lose money here. I am saying that it is not about India. That’s the nature of the beast. Every bubble collapses.


If there is such a pessimistic view on what might be achieved….
I am not pessimistic. I am being realistic. All I am saying is that we are becoming too self-congratulatory. That’s all I am saying. India has done a reasonable bit, but not quite enough to deserve the billing that it is getting. If you call that pessimistic, so be it. But on all human parameters, development indices, we are way behind. And for me, as an Indian, that is more important than just looking at the Sensex and saying that the index goes up to 22,000 and India has progressed by 30%. That is not just correlated, boss. They are two different things. The Sensex is just a two square mile phenomenon — Fort to Nariman Point. That is about all that is interested in the Sensex. Large parts of the country have no interest and thank God for that! When their life’s Sensex goes up, that is when I will truly become bullish. This market going up is benefiting 25 brokers, 200 promoters, 100 funds. Iske aage kisko fayeda ho raha hai, boss?
500 entities is what the total interest groups involved in the stock market will add up to. That’s it. In any meaningful term. Don’t tell me that there are 50 lakh demat account holders and all that. Those are just numbers. Investors have 100 shares of something or 200 shares of something else in those accounts. They don’t even look at it. It doesn’t affect their daily lives.
Talking of equities, there is concern that money that came through exchange-traded funds (ETFs) in India is leaving…
If the sentiment turns negative on emerging markets, you can see a reversal in ETF flows. And that is actually quite dangerous because ETFs don’t discriminate between markets or stocks. It’s just a big blanket trade, which becomes quite a dangerous thing in a bear market because it is non-discriminating money, that does not distinguish between companies. An ETF will sell an equal quantity of Hindustan Lever (HUL) and Jaiprakash Industries, as much as what is represented in the index.


You just talked about HUL. In the last 10 years the stock hasn’t gone anywhere?
More. From 1997-98, for the last 12 years, it has been in a bear market. It’s all-time high was Rs 324. It has gotten close to that price, flirted, but not quite there.


What’s wrong there?
Nothing’s wrong there. The fact is that we overpaid for what was back then a great company. I don’t think it is a great company now. I think they lost their way and other companies like Nestle did phenomenally well and they cashed in on the big consumer boom that happened in India but Lever somehow lost its way. ITC, coming out of nowhere, has done a pretty good job. We overpaid for Lever back in the nineties. We were paying, 50, 60, 70, 80 times earnings. It was a great company. I used to argue many times that it’s a great company, but 80 times earnings for what yaar? And then people used to say that “consumer boom India mein hoga (will happen in India). And hua bhi (it happened). It was the 800-pound gorilla of the industry, which was at that point considered as a strength — that it could spend Rs 550 crore on advertising, which was morethan the turnover of a lot of other companies. But unfortunately, life is never that simple. Lever became so large it had to leave or vacate a lot of profitable or smaller pockets of the market, which other companies got into.
That’s the way large companies wither away and smaller ones grow. Lever is a classic example. We overpaid for it and it never boomed because it was already a very large company and by virtue of that size, any boom will never come in the largest category, it will probably come in a relatively small category and you will wake up only when the small category has become very large. When a Rs 100 crore brand becomes a Rs 1,000 crore one, then Lever will say, Wow man, this is a damn good business, let’s go back into it. But it has missed the first-mover advantage; somebody else has taken away the turf. It’s like the mobile business. When Sunil Mittal got into it, it was a nothing business. When it became large, everybody jumped into it. But he has made the money. Nobody else is going to make that much money.


What are the three key reasons for the markets to go down than up?
The first reason is obviously the dollar has been beaten down too much and there is a case to be made for a counter-trend rally in the greenback. Second is increased protectionism, which will probably cause the second leg of the downturn. We are already seeing that beginning to happen. And the third is the implosion of the China bubble. I am convinced about it. It cannot last. And that’s what has propped the emerging market trade by and large. I mean, if you think about it, India is not really as commodity-centric in as a Brazil or Russia, but actually our large companies are all commodity-centric be it is Reliance, ONGC, Cairn or Tata Steel. A large part of the index is actually very commodity-driven, boss. But nobody thinks of us as a commodity-centric country. So oil goes to $40, I can tell you that RIL, Cairn or ONGC will not hold up. Or for that matter the commodity basket itself because oil will not go down alone, it will drag down steel also, it will drag down copper also, you know.


What is your view on the dollar?
I think cyclically we are due for a rally in the dollar, which again correlates well with where the markets are going, which is when we have a relatively stronger dollar. Then we have weakening emerging markets. So I think the trade which worked in 2008 is coming back, which is long US and short emerging markets. I would rather be long in the US and short emerging markets than the other way round right now.


What about gold?
I am not a believer in gold. I have been negative for many years. Save for when it was at $250-280 (per ounce). I thought there was trade in it then and it would go to $600-700 because it had been a huge bear market for 30 years. So that said, I think gold is a completely nonsensical trade. If inflation is going up, I’d rather buy something that people would buy more of in order to produce the goods and services that they want to. Like copper, for instance; that has use, right? Gold, why should I go and buy if prices for foodgrains or whatever are rising? I don’t see the connection. This is another of those old-wives tales.


What about other commodities?
Again, broadly speaking I am not a big believer in commodities on a philosophical basis, that’s not to say that I will pass up a good trade. My view is that the world cannot have a commodity bull market for one major reason —- it actually impoverishes people, it doesn’t enrich us, unlike a bull run in other asset classes. We love a bull market, we love bubbles.
A property bull market, property boom, property bubble — we love it. Stock market, we might own 200 shares, but a boom still makes us relatively richer. The only bubble populations hate is the commodity bubble. Save for, let’s say, the gold bubble, and forget about that. Inflation is only a matter of enriching a few Indians. But broadly, all commodity price inflation is going to hurt you and me. I do believe that there is a natural human barrier to paying higher prices for a commodity. And governments will, by force, by fiat, by any means possible, legally or illegally, ensure that commodity booms are pricked. You can play it as a trade but I don’t belong to the Jim Rogers school to believe that there is a perennial bull market in commodities.


Not even agri commodities?
It has to be pricked, boss. What will you do? Look at sugar, halat kharab hai ekdum (the situation is pretty bad). But then wohi hota hai (that’s what happens). For a while it will run, but then something will happen. Controls. Or people will simply stop consuming. We end up buying more of stocks and real estate when they are running up. But we don’t buy more of tur dal and sugar when they are running up, right? We don’t fill up more petrol because oil prices are rising. We probably think of cutting back here or there.


What do you make of the Obama administration attempts to end proprietary trading by investment banks?
Not just prop trading, he has talked about offshoring also. I don’t think we should underestimate that particular issue even ifthe IT industry may shrug it off. Look, we all thought Wall Street was a holy cow and no US politician would ever do anything that hurts its interests. But this guy Obama is clearly thinking differently. So when he talks about offshoring becoming the new enemy I think we have to take him very seriously because if he can hurt the interest of Wall Street banks, which are a huge interest group in the US and they dominate a lot of a policy-making there, what are half-a-dozen Indian IT companies? We are not there even on the radar by way of any influence. I’d be very concerned. Fine, we can always say six months later that nothing happened. And I’ll be glad because my fear is that if a tax is imposed it clearly becomes a big problem for Indian companies. In India growth has been from the domestic consumption story and the IT boom has driven a very substantial part of it for the last 10-15 years.


What about the Union Budget? Not too much of a case for the market to anticipate much?
Yes I agree. But to be honest with you, I mean again I attach too much rational sense to what the market does. It all depends on what the general events around that day are on the global macro and corporate fronts. We should be slightly careful in ascribing market moves after the Budget to just the Budget. Sometimes the market is just poised to fall and it does. Sometimes it is poised to rally and it does. And the Budget, anyway, I don’t think has much of an effect on the market beyond the first week because I have never seen anyone even remember the Budget or its proposals unless it is something terrible like fringe benefit tax, which is remembered for 5 years.
Do you expect the Budget to take measures on fiscal deficit?
I doubt they will do anything immediately. I don’t think they will roll back whatever they did in December 2008 or January 2009, whenever the so-called stimulus package was brought in. I don’t think it was a stimulus package, but for lack of a better term, we started calling it that. But I just think because the markets are very nervous and on top of that there’s the divestment plan which stretches out all the way into the horizon, I doubt if they will do anything immediately. It will happen at some point. But I don’t think they will upset the applecart just yet.
Divestments will also depend on the market…
Which is why they will not roll back or at least they will not contribute their bit to bringing the market down.
What do you read?
I don’t read newspapers.
We didn’t mean newspapers…
But I do read DNA Money, by the way. And I am not saying this out of politeness. I think this is the only newspaper I read because I think it’s a terrific paper. I really find something useful in it almost every day. But by and large I don’t read newspapers.
What is the last good book you read?
Actually I have stopped reading books on finance also.
Generally speaking. It need not be a book on finance…
Oh. I read a lot. Everything other than finance I read now.
Chetan Bhagat?
I read Five Point Someone many years back when it had just come out.
That was his best book…
Yeah, after that people told me the other ones are not that good. So I thought let’s stop it at the peak, boss. Right now I am engrossed in watching this serial called 24. I am absolutely addicted to that. I keep watching that and that has affected my reading. Crime thrillers are something that I have been reading since I was a kid. And there are a lot of books lately that I have bought. Superfreakonomics I am half way through. The Logic of Life was the last book I read and that was interesting.