India’s Stock Market Can Still Go Down A Long Way, Says First Global’s Shankar Sharma
India’s equity indices entered bear market territory amid concerns about the economic impact of the novel coronavirus outbreak. Yet, First Global’s Shankar Sharma said there was still room for further declines.
“The market saw back-to-back years of 30 percent gains in 2006 and 2007. We all know how 2008 ended,” he told BloombergQuint in an interview. This fall, too, began at a time markets were close to their highs, leaving a large room for a drop, he said. “I had said it at the start of the year, we’d be lucky if we end 2020 on a flat note.”
The Nifty 50 and the Sensex slumped more than 7 percent intra-day and have tumbled more than 20 percent since their January peaks, entering a bear market—a condition in which prices of securities drop 20 percent or more from recent highs amid widespread pessimism and negative investor sentiment. The benchmarks joined global peers in their worst selloff since 2008 as the spreading Covid-19—that the World Health Organization declared a pandemic—threatens to stall economic growth.
Expecting the markets to shrug off a problem as significant as this is “foolhardy”, Sharma said, adding that none of the previous two crises got over in two months.
Here are the edited excerpts from the convesation:
You were making this point about how this time is different simply because of levels and a lot of other factors being different compared to the previous times?
Yes, correct. If you go back to 2008 and the SARS crisis, 2008 happened because of financial leverage. Financial leverage can be resolved through additional capital with the central bank provided. SARS came at a time when global markets had already undergone a brutal bear market for three years after dotcom meltdown. It happened in 2003 and the bear market started in 2000. We’d already undergone a very substantial bear market. The Sensex had already crashed; I think 50 percent by the time SARS virus hit the world. So, there was not much room left to fall.
Here, this is happening at a time when everything was at a high despite the global earnings picture and Indian earnings picture not being that robust on a widespread basis. It was being contributed by a very narrow set of companies. We know that just a handful of companies were driving earnings growth as well as the stock market growth. When a narrow market collapses, the reasons can be many, but it will collapse for a genuine reason and that’s that earnings outlook has just vanished. At least for large parts of the market. So, these are the fundamentals and they are really looking terrible.
Even if we say the fall was warranted, what do you think happens now?
If you look at the markets globally, I think the S&P made a 52-week low yesterday for the first time. I think the Nasdaq may have made it, it might be close to that. A bear market typically can go on for a pretty long time. Again, I point out a context. 2019 for the world, barring India was an absolutely blow out here. We had like 37 percent rise in Nasdaq, 50 percent in Russia and 30 percent across Europe. With that kind of market in any case, the following year is almost never a good year. Look at history of markets very few years you will see back to back gains of 30 plus percent, but it happened only in 2006 and 2007 in living memory, and you know how 2008 happened. So again, it’s important to look at data.
When 2019 ended, I was telling my team that we will be lucky if we end flat for the 2020 year because everything is frothy, all asset classes did well, and you just need a small fire, small ledger spark to ignite a big sell off and we found that small spark coming from the coronavirus, but it just happened at a time when markets had a very strong 2019.
Hence the fall is being the magnitude is such that you can go down a long way before things stabilize, because you’ve run up a long way in the last few years
Everyone is anticipating liquidity to do the trick. There are a lot of expectations from the Fed and coordinated effort from central banks to put a fix to this. This will not inherently deal with the demand and the supply shocks that are there in the system. You’ve got Japan announcing a stimulus of $4 billion, you’ve got the Australian government talking about a stimulus package and Donald Trump is talking about payroll tax cuts. How’s that going to improve the key issues? What are you going to see in terms of pickup in earnings or pickup in overall growth.
See, we tweeted on our first global handle yesterday that bear markets end, and they absolutely. It’s not as if they end. I am talking as if a bear market means something like what we are witnessing right now. It’s not like a garden variety 10-15 percent correction, which will happen routinely in market and we have seen many of that even in 2018 December. We saw a pretty severe fall. But that was more like a just a correction of a pretty strong bull market. Here you’re talking about a significant fundamental-driven bear market, which is exactly what 2008 was, which will exactly what 2000 was- which was even what 97-98 was.
None of those prices got over in two months, none of them. That Asian crisis took two years to wind down, the SARS and Dotcom crisis took three years to wind down, the 2008 crisis was at least a year and five months or six months. Here we are the first month or maybe the second month into this major collapse. Governments will come across the world with packages, but it takes time to seep in and these things don’t turn on a dime. This scale of economic disruption. I mean, I have never seen anything like this in my 30 plus years of analysing markets, talking on a worldwide basis, let alone India.
No matter what governments do, things will take time to come back to normal and you’re talking several months, and even getting a vaccine for this is probably two years away. That’s what I was reading. It’s not like you can just get a cure done immediately. So, I think it’s a very significant problem and expecting markets to just shut them off is being very, very foolhardy.
What would the advice be to an investor who’s watching you right now Shankar and who is fearful that this disruption could continue for longer? They’ve already seen their portfolios bleeding out, probably 5 percent additional cash that they would have in their kitty after deploy 95 percent already. What’s the advice to such an investor?
My advice has always has been this. Just being a one trick pony, which is all an equity pony, is not wise. You need to be diversified across asset classes. You will find in situations like this, that if you were genuinely and tactically diversified across four or five major asset classes, you were at least not as badly hit as a pure equity player. People forget these lessons; all the lessons are out there. It’s not that I am saying anything new that hasn’t been known for maybe 100 years. But we forget them in easy times. My view is that this year is not going to belong to equities. Selectively, yes, there will be pockets but definitely not a widespread equity play this year for sure. I mean, there are other places to park your money in.
A lot of people who optimists are are taking refuge under ratios of the past, which might be at a level from which we have typically bounced back. If you in your career have not seen anything like that like this before, can you go out and even attempt at predicting the extent of damage that could come in? We might recover from these levels. But my question is, how can one say it with even a remote degree of certainty?
My view is that there’s no point in being too early in these trades. Markets give you enough clues when things turn and even if you bought 10 percent 20 percent higher with the comfort of knowing that now the worst is over, I think you’re just fine. There is no point in just trying to be the first guy at the point a bear market becomes a bull market.
For example, in March 2009 when the last bear market ended and I’ll confess that while I thought it was going to end I did not act on it because the previous 15 months has been so brutal that one was just scared to change one’s thinking. But I changed three months later, I changed in the month of June. That’s already when 30-40 percent rally had happened in stocks. But did it matter, in hindsight, 10 years later? No, it didn’t matter. It didn’t matter one bit. I was buying therefore with the comfort that look, the bear market is dead now. It’s a bull market and I’ve seen two three months of solid price gains. Solid sort of momentum. Now that’s confirmed.
I did not buy a two-day rally or a five-day rally or a one-week rally and we will get those rallies and I am repeating we’ll get those rallies in the current phase also. But we need something which is more durable a month, two months, three months of solid stock price gains. Some good news seeping in. That’s the time when you go out and buy even if it’s 30 percent higher.
Two days ago, you tweeted out that the situation for India’s market is a lot worse than was in 07-08. But you mentioned that this may be different for India and worse than even the global financial crisis, at least for India.
Without any doubt.
So, would you reckon that the pain is not out of the system as yet for the Indian market?
We are talking virus and health, so think about it. The virus affects people who are sickly. It will affect everybody it can, but it affects more the elderly, more the people with low immune systems and more people who are sickly.
India in 2007 going into 2008 was a robust, thriving vibrant economy which had just grown 10 percent. 2007 was the 10 percent growth year within under 1 percent fiscal deficit. You weren’t going into a huge crisis once in a 100-year crisis in the pink of financial health. Hence, India came out of the crisis looking actually the best of any country in the world. After that, we still grew at 7.5 percent CAGR, which is better than practically any country coming out of the crisis. This time you were already down to 4-4.5 percent. Even you could believe these numbers, probably more like two and a half percent, and then you get hit by a crisis like this. You are already struggling, rural growth is already struggling, corporate India’s leveraged, banks don’t want to lend and on top of that the last thing we could afford is a virus situation. So, you are actually a high-risk person to contract a big problem, which is a genuine cut to economic growth. India is just not equipped to handle this. I’m not talking medically, I’m just talking financially.
Crude oil price is the other element in the mix. Does that in a way prove to be a silver lining for India? Should one also take cognizance of the fact that you know, GDP numbers may look slightly better, inflation numbers may look slightly better, and therefore, we may have a lot more headroom to do things to boost the economy?
I am out of the view that a $20-30 oil is anyway good for India. It is only good if it happens in the way that 2016 or 2015 crash happened, when nothing else changed in the world and just oil fell. There was no global macro dislocation. It was just a huge fall from $95 to $27-25. That kind of thing is great for India.
Right now, what is happening is crude is only reflecting the global meltdown in GDP growth expectations. When this happens, India is not going to be immune to that. Remember one more thing that crude is only one component. Crude fell to $150 to $30 in the middle of 2008. The market still fell from 16-15,000 to 8,000 in the remainder of the nine months going to March 2009. So, it’s not that crude- in an overall global meltdown is going to help India. It doesn’t help economic growth because it’s just actually a reflection of the poor fundamentals of the global demand situation. That is the problem. 2016 was a very different fall. But this is not the same.