Shankar Sharma, global trading strategist at First Global, shares his view on how the Indian market is going to perform ahead. “Since India offers better value than other markets, we expect it to outperform. Commodity prices will decline in the coming months,” he added.
Below is the complete interview. Watch the accompanying video here.
- Q: How do you react to the sharp cut in GDP growth estimates for the Indian economy? Are we in for a bigger slowdown phase than we are prepared for?
- A: Largely, the cuts in the GDP growth estimates have come because of the lowering of agricultural growth number that is to be expected without a doubt. That is not a great surprise and because of that you are seeing the number slide down from 6.5 per cent, 6.7 per cent to 5.5 per cent, 5.23 per cent. So, yes, that does seem highly probable.
- Q: In all your years of experience in the markets, how would you correlate a deficit monsoon and its impact on markets? How would the drought conditions impact consumption sectors?
A: It is sort of hard to make a one-to-one correlation between the drought and the consumption tapering off because during drought, you might see pretty high increases in the prices of commodities, which usually benefit the producers, the farmers. So, one thing could offset the other and therefore, mitigate the effect of the drought. So far, whatever we understand on the base, the companies and even anecdotally, there does not seem to be a big slowdown in the rate of consumption in rural India—it may top, if not 9 per cent, but 6 per cent growth. It’s not as if everyone is falling off the cliff, so my view would be that there would definitely be an offsetting effect of higher food grain prices versus lower production. So, I think net-net it doesn’t look like a big doomsday situation for consumption.
- Q: In the backdrop of all the weakness and lack of policy action, is the recent momentum justified?
A: Markets are usually trying to be predictive. I will not say that markets get it right all the time; they get it wrong quite often. However, the market is setting in great round of interest rate cuts and I think given the data, the RBI has to do something on that front. I mean it is high time that the RBI understood that there is no relation between monetary policy and inflation in India; at least to the extent of WPI numbers.
I don’t know what dream are they chasing. They have to understand that keeping rates this high in a situation where the rest of the world has decreased it down to zero, virtually, how do you expect the industrial growth to take place? How do you expect Indian companies to compete? So, hopefully the RBI will change its mind and start to cut rates especially in light of the IIP numbers that we saw and because of all that, I think the market is factoring in that one thing, which is to make sure that India will do a lot better than the competing economy because India is a net consumer. The commodity prices look sharply low in the next months and years because of the big China slowdown. So, all that will be good for India’s current account deficit, for current inflation and that will also mean that the world will also look at India as the only place where you can find some degree of safety because the commodities will obviously be hurting. China’s equity market has been an absolute disaster, so foreign capital will flow into India and will further strengthen the rupee and because of that the inflation will again be lower and the rate cuts will happen. So, I think that’s the scenario the market is building in.
- Q: How do you react to the change of guard at the finance ministry?
A: Pranab Mukherjee had a good run as a finance minister; particularly his handling of the 2008 crisis was very good. He was very proactive, he did the right thing by providing some stimulus through the cuts on excise and service tax. However, the last budget was an unmitigated disaster. I don’t know how he could justify and he did end up justifying on television many many times as to why the General Anti-Avoidance Rules (GAAR) should be there, while Vodafone tax, retrospective tax should be levied; it was completely indifferentiable. I think the Prime Minister did not like that because ultimately Manmohan Singh is a very pro-business person. He believes, and rightly so, that the foreign capital is scared at least temporarily and India needs foreign capital to drive growth because we are a capital deficient economy.
So, I think in a way getting him to be the President and then vacating that seat himself, becoming the finance minister for a while, he set in a motion, which what Mr. Chidambaram is going to take forward that we have to go back and reconsider our call on tax on Vodafone as well as on GAAR. I think that Mr. Chidambaram, by changing the guard at the finance minister level, by moving the revenue secretary to becoming an expenditure secretary, has clearly shown that where the mind of the finance minister and the Prime Minister is, which is really to remove these kind of self-created goals. We could have done without them and I think hopefully, they will set them right. So, I think it’s a very positive move to have Mr. Chidambaram in now.
- Q: What is your opinion on the first quarter FY13 earnings season? Is the worst yet to come?
A: No, I wouldn’t say that this is the bottoming of the earning cycle. If you take large companies like Bharti or Infosys or even Reliance, I don’t even think it is bottomed out, in stock price terms or in earnings terms, and they contribute a large proportion of our overall, let’s say 20-30 per cent of Nifty 50 profits. I don’t think those companies are bottomed out. I think Bharti’s numbers are even worse than they are in the last quarter.
I don’t think Infosys numbers are improving any time soon and not even the Reliance numbers. Also, I would not be as optimistic that the earnings cycle has bottomed out. Tata Motors and SBI numbers have not been that bad. Those are the sectors that we like but I would not hazard against that. We have really hit the bottom in terms of earnings numbers.
- Q: Almost half of this fiscal is over. What is the performance outlook from the rest of the fiscal FY13?
- A: One thing I am pretty clear about is that we are going see India outperforming. I think it is already showing you enough profit in the first half of the year. It has done really well in the important markets, in the major ones but in this calendar year, India will really outperform dramatically.