ET Now talks to Shankar Sharma, VC & MD, First Global.
How would you sum up what's happened overnight. While there may be an impact on a short term basis do you really read this as a long term dampener for the market?
I have said this many times no matter what people might feel about growth in a particular country. For instance, in India or in China. The fact remains that macroeconomic growth is not correlated. Markets are totally correlated. So that is the essential fact. India started to rally after the budget. But guess what, every single markets are going onwards, so they had no budget but this thing as well. Fact is that everything is correlated on the market basis so when this happens it inevitably does affect markets which may have nothing to do with the current problem. So I do suspect that along with the rest of Asia we will also take a cut on Wednesday. On a longer term basis 12 months from now what would emerge is very hard to say, but for the short term it definitely does act as a dampener without any doubt.
And how would you define this short term period, because as it seems first we heard about the Dubai crisis, then about the Greece and now there is talk about Portugal. There could also be something in the wings about Turkey and Ukraine, all these eastern European countries and then there is all that news about Goldman Sachs and the SEC filing how are you reading into all this news flow in terms of an overall impact about how much it can peg markets down by?
Let me give you a quick sense of the data. The data says that from beginning of October 2009 till let said today and let say assume a 150 point cut on the Sensex which is reasonable about 1.5%. The Sensex will actually be flat, flat from beginning of October till today. China, of course, is down. Emerging markets overall are up about roughly 3% from that time while the US is actually up 11% so you can make some analysis out of it that despite having great growth and all the numbers India has actually underperformed even a market like the US that is telling me that markets like India are actually probably more vulnerable in a downswing like this and the US because these are the markets with high expectations and when a crisis happens people take money off the table in market where they are actually sitting on some kind of gains which is where the gains were the gains of the second quarter of last year come in. So I do think that rightly or wrongly we will also get hit along with the rest of the global markets.
I am just referring to your first answer that today the markets will fall and we will have a bit of an impact 12 months down the line we don't know what will happen but do you believe that this is probably the start of something that could get worse over the next 2 to 3 months or this is a short term phenomenon which could get corrected over the couple of months?
In fact we have put out a presentation and a research note just about a month and a half back actually 2 months back in which we detailed the problems that were building up in the global financial system which we kind of have forgotten for the last 9 or 10 months because of the equity rally and that narrow down precisely on the problem that we saw last night which is the problem of Greece and the rest of the weak European nations. So what we saw yesterday was something that we precisely have been in fact we have been going around on a road show presented to clients even as the crisis actually happened so I do suspect it has very serious ramifications on global economic growth, economic growth in Euro zone for sure and when I think like this happens unfortunately again then economics did not really arithmetical signs it can actually start to manifest itself by attacking countries which are probably even very strong. As we saw in the Asian contagion so these things should be knit in the bud but if they aren't then they can have outcome which even I cannot sit and foresee just like the subprime problem started out as a very small problem almost like a pimple and ahead a bit I mean a huge cancer or tumour so you never know how things can spiral out of control.
Just wondering you study this much more closes I am just throwing it out of the hat they have said about Greek bondholders will have to take a deep haircut, almost 30% or almost 70% of what they hold could probably get wiped off. Could this escalate into worries for countries, which have a higher fiscal deficit and, therefore, could affect fund flows over the medium term?
Absolutely, that is pretty arithmetical but more importantly what it will also do is that whenever there is a crisis, we have always seen that money flows back to the US, so that is the other broader aspect of this that one must begin to account and whenever you have a problem, money flows back into US treasuries or at the margin into US equities and the dollar actually strengthen and all those three things are now you will begin to see manifest themselves, so the dollar strengthens, money flows back into the US, all of that again drains liquidity from markets like India or for that matter the entire emerging market pack. So crisis like this also has the effect of turning of the liquidity from markets, which have actually done no wrong, India has done no wrong but again markets are not always fair.
How much downside do you expect for the market and would that really translate into a short position on the index?
Look I do not think today sort of is the final arbiter or what happens three months down, today might be a cut of some proportions. We will again try and fight back through the results season but that said, overall given the data, which is there for six months or seven months, India has actually lagged even emerging markets, forget about the US. India might hurt a tad more than the rest and if you look at the heavyweights, none of their numbers seem very inspiring, particularly a company like Reliance or I do not think telecoms will do much either, so those things might again, everything kind of happens together in market, so you have Greece and then you will have Reliance and then again very unfortunate and for that matter Maruti, those things can have a reasonable impact on the markets definitely.
Is it on levels perhaps where you think there would be a strong flow because we are expected to reach 5300 this morning? If there is more news flow, which is negative in nature that comes out over the next 2-3 months where fund activity is not at really its peak could be even be working with the case of testing 5000 over the next three months?
I do not watch the Nifty, so what would that be on the Sensex?
About 14500-15000?
Yes. Then I would not rule that out at all, that's exactly where we were a couple of weeks or may be a week before the budget, 15500, so that's not that out that we can say that it can happen. Just two months back we were there. We could go back there.
What to your mind is worst position right now? The obvious suspects would be the commodity space, probably real estate, so on so forth but what would you look at with a close eye to probably buy into should the fall be more exaggerated than what we are thinking right now?
We have liked the auto space and the pharma space for a while now and continue to like them, so we think that any correction in those sectors and I am sure they will also correct because nothing can be immune, that would present a terrific buying opportunity in at least these two spaces.
Reliance Industries in particular because we saw the results not proving to be too much of a dampener but there are upcoming things as well, the likes of the court case with RNRL, what for Reliance Industries considering that it has so many events piled up?
Yes, there is a huge event risk for both sides of the equation, which is the ADAG Group or the Mukesh Ambani Group, so whichever way that pans out, I have no insider track on that but the numbers were obviously disappointing but we have had a sort of at least a lukewarm Reliance for over a year now, so that was pretty consistent with at least what we had forecast.
How would you sum up what's happened overnight. While there may be an impact on a short term basis do you really read this as a long term dampener for the market?
I have said this many times no matter what people might feel about growth in a particular country. For instance, in India or in China. The fact remains that macroeconomic growth is not correlated. Markets are totally correlated. So that is the essential fact. India started to rally after the budget. But guess what, every single markets are going onwards, so they had no budget but this thing as well. Fact is that everything is correlated on the market basis so when this happens it inevitably does affect markets which may have nothing to do with the current problem. So I do suspect that along with the rest of Asia we will also take a cut on Wednesday. On a longer term basis 12 months from now what would emerge is very hard to say, but for the short term it definitely does act as a dampener without any doubt.
And how would you define this short term period, because as it seems first we heard about the Dubai crisis, then about the Greece and now there is talk about Portugal. There could also be something in the wings about Turkey and Ukraine, all these eastern European countries and then there is all that news about Goldman Sachs and the SEC filing how are you reading into all this news flow in terms of an overall impact about how much it can peg markets down by?
Let me give you a quick sense of the data. The data says that from beginning of October 2009 till let said today and let say assume a 150 point cut on the Sensex which is reasonable about 1.5%. The Sensex will actually be flat, flat from beginning of October till today. China, of course, is down. Emerging markets overall are up about roughly 3% from that time while the US is actually up 11% so you can make some analysis out of it that despite having great growth and all the numbers India has actually underperformed even a market like the US that is telling me that markets like India are actually probably more vulnerable in a downswing like this and the US because these are the markets with high expectations and when a crisis happens people take money off the table in market where they are actually sitting on some kind of gains which is where the gains were the gains of the second quarter of last year come in. So I do think that rightly or wrongly we will also get hit along with the rest of the global markets.
I am just referring to your first answer that today the markets will fall and we will have a bit of an impact 12 months down the line we don't know what will happen but do you believe that this is probably the start of something that could get worse over the next 2 to 3 months or this is a short term phenomenon which could get corrected over the couple of months?
In fact we have put out a presentation and a research note just about a month and a half back actually 2 months back in which we detailed the problems that were building up in the global financial system which we kind of have forgotten for the last 9 or 10 months because of the equity rally and that narrow down precisely on the problem that we saw last night which is the problem of Greece and the rest of the weak European nations. So what we saw yesterday was something that we precisely have been in fact we have been going around on a road show presented to clients even as the crisis actually happened so I do suspect it has very serious ramifications on global economic growth, economic growth in Euro zone for sure and when I think like this happens unfortunately again then economics did not really arithmetical signs it can actually start to manifest itself by attacking countries which are probably even very strong. As we saw in the Asian contagion so these things should be knit in the bud but if they aren't then they can have outcome which even I cannot sit and foresee just like the subprime problem started out as a very small problem almost like a pimple and ahead a bit I mean a huge cancer or tumour so you never know how things can spiral out of control.
Just wondering you study this much more closes I am just throwing it out of the hat they have said about Greek bondholders will have to take a deep haircut, almost 30% or almost 70% of what they hold could probably get wiped off. Could this escalate into worries for countries, which have a higher fiscal deficit and, therefore, could affect fund flows over the medium term?
Absolutely, that is pretty arithmetical but more importantly what it will also do is that whenever there is a crisis, we have always seen that money flows back to the US, so that is the other broader aspect of this that one must begin to account and whenever you have a problem, money flows back into US treasuries or at the margin into US equities and the dollar actually strengthen and all those three things are now you will begin to see manifest themselves, so the dollar strengthens, money flows back into the US, all of that again drains liquidity from markets like India or for that matter the entire emerging market pack. So crisis like this also has the effect of turning of the liquidity from markets, which have actually done no wrong, India has done no wrong but again markets are not always fair.
How much downside do you expect for the market and would that really translate into a short position on the index?
Look I do not think today sort of is the final arbiter or what happens three months down, today might be a cut of some proportions. We will again try and fight back through the results season but that said, overall given the data, which is there for six months or seven months, India has actually lagged even emerging markets, forget about the US. India might hurt a tad more than the rest and if you look at the heavyweights, none of their numbers seem very inspiring, particularly a company like Reliance or I do not think telecoms will do much either, so those things might again, everything kind of happens together in market, so you have Greece and then you will have Reliance and then again very unfortunate and for that matter Maruti, those things can have a reasonable impact on the markets definitely.
Is it on levels perhaps where you think there would be a strong flow because we are expected to reach 5300 this morning? If there is more news flow, which is negative in nature that comes out over the next 2-3 months where fund activity is not at really its peak could be even be working with the case of testing 5000 over the next three months?
I do not watch the Nifty, so what would that be on the Sensex?
About 14500-15000?
Yes. Then I would not rule that out at all, that's exactly where we were a couple of weeks or may be a week before the budget, 15500, so that's not that out that we can say that it can happen. Just two months back we were there. We could go back there.
What to your mind is worst position right now? The obvious suspects would be the commodity space, probably real estate, so on so forth but what would you look at with a close eye to probably buy into should the fall be more exaggerated than what we are thinking right now?
We have liked the auto space and the pharma space for a while now and continue to like them, so we think that any correction in those sectors and I am sure they will also correct because nothing can be immune, that would present a terrific buying opportunity in at least these two spaces.
Reliance Industries in particular because we saw the results not proving to be too much of a dampener but there are upcoming things as well, the likes of the court case with RNRL, what for Reliance Industries considering that it has so many events piled up?
Yes, there is a huge event risk for both sides of the equation, which is the ADAG Group or the Mukesh Ambani Group, so whichever way that pans out, I have no insider track on that but the numbers were obviously disappointing but we have had a sort of at least a lukewarm Reliance for over a year now, so that was pretty consistent with at least what we had forecast.
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