Sensex may drift down to 12500, -ve on RIL: Shankar Sharma

Sensex may drift down to 12500, -ve on RIL: Shankar Sharma

Shankar Sharma, Vice-Chairman and Joint Managing Director, First Global, says the Sensex can drift down to 12,000-12,500. He feels the next 3-4 months would to be challenging for equities. "We are looking at a 20% fall in global markets, so India would sell off more if they fall."

Shankar advises investors to stay away from high beta stocks. He is negative on Reliance Industries.

Below is a verbatim transcript of the exclusive interview with Shankar Sharma on CNBC-TV18. Also watch the accompanying video.

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Q: It looked like global markets were getting ready for a deep correction last week, and then suddenly things have turned around and the S&P has gone right back to 1,100 again. Do you think the correction is over?

A: No. In fact, when the correction happened, I was of the view that we would get another bounce. Call it a sucker rally or whatever but I was personally of the view that we would see about 16,700–16,800 on the Sensex and US markets would probably go back to their highs or close to their highs. I think the Nasdaq 100 did get back to its highs yesterday.

What is interesting is that the emerging markets are still reasonably far away, good 2% on the aggregate from their highs whilst the US markets have made their highs. That is an interesting disconnect because usually emerging markets should have made their highs a lot earlier than the US markets ought to have but that has not happened this time.

Even today the follow through from the emerging markets (EMs) is far less vigorous than what one would have imagined given the size of the move yesterday on the US markets. Even yesterday, EMs were not that robust except the European and the Latin American end. But Asia was by and large quite tepid, and even today, I don’t see much sort of vigour in the move.

So that is beginning to, at least, surface a slight disconnect between what is happening on the EM side versus what is happening on the US equity side. My sense is that EMs will begin to lag significantly and that usually happens when markets fall rather than when markets rally because it is hard to imagine that EMs won’t participate in any big rally in global equity markets from hereon. So if EMs lag, that is usually a precursor to sell-offs rather than big rallies globally. My sense, therefore, is that over the next month or so, you are going to start seeing the reversal of what began in March this year and the next three–four–six months could be extremely challenging for equity markets globally be it India or be it the rest of the world.

Q: We are at that Sensex level you just talked about. So what seems the more likely move from here that we get into a trading range or that this market corrects faster than the others?

A: If markets do sell off India will sell off a lot more and my view is that markets globally will sell off rather than rally. They could do 1–2% here or there that’s fine but by and large I would on the side of the trade that I will wait for a chance to get shorts in rather than big longs round here globally.

If markets do well, which I think they will, India will sell off a lot more than that. I am looking at about 20% fall in global equities from hereon. India being typically at the high beta end of the market will probably fall a tad more than that and so will the other high beta emerging markets like Russia or Latin America.

Q: You are saying a 25% correction in the index in India is likely which would take it back to again that 12,500 kind of zone?

A: That wouldn’t surprise me in the least, absolutely not. I would definitely hold that view over the next six months that you could go all the way back to 12,000–12,500 and who knows as we always know overshoots happen on either side of the market. So on a bad day you could slide down 500 points even from there. Definitely, I do not think the upsides are there incrementally. You get a blast last rally, which could take you 200 points higher, that’s fine, that’s for a quick trader but not for any serious investor, definitely not.

Q: You would be very surprised if the year end saw a big move up for the markets because the counter argument is that liquidity is still comfortable and there may almost be a scramble to get something done by the end of the year by way of a performance?

A: These theories are very bad except that usually when they work, we say the theory works but there are enough number of times when they don’t work. Statistically, I am not a big believer in these easy, cozy theories because markets are all about destroying, precisely, those kind of theories.

If you think about the correction that happened in the last fifteen-twenty days globally, there was no apparent reason why it should have happened. That is the interesting bid that it was accompanied by pretty much good news globally. If you would look at the US gross domestic product (GDP) numbers, they were quite strong.

South Korea did blowout numbers on their GDP end. By and large, there was nothing that merited a sudden sharp fall of the kind that we saw. That makes you begin to think that is the market reading something which the headlines are not highlighting just yet? Go back to March when the rally started, there was still bad news. It continued for a good month to a month and a half, it was only around late May or June that you started to see real sequential growth coming in. However, I do remember the headlines in late March or mid-April and I was saying that the fundamentals have still not turned. The fact is that they did turn sequentially but it took a good two and a half months.

So sometimes market moves without reasons, you need to probably think a lot deeper that what is the market’s inner mind telling you. So my sense is it could well be that the market is beginning to read that in the next three–six months’ time, this whole easy liquidity and low interest rate and low inflation theory, which has made this move happen could go out the window because now you are going to see the ill-effect of a low inflation base this year begin to creep up from Q1 of 2010 and then again sequentially earnings may not be as strong as there has been because we were coming out of an absolute trough. So maybe the market’s mind is beginning to read those things that sequentially issues––be it on inflation or on rates or on earnings––may not be as robust as is necessary to propel this market higher.

Q: There has been a lot of talk about the dollar carry trade and how that’s fuelled asset prices and whether it will reverse in the next few months. What are your thoughts on the dollar and whether that might pan out?

A: When the dollar falls then you have a big rally in global equities, and particularly, in emerging markets. But I was looking at history and I was not able to find that this is a perfectly correlated situation and I am a big believer in that theory and I belong to the camp that the dollar has to strengthen for markets to fall and it could well do so.

However, there have been reasonable periods and even in the last three years in which it was counter to the conventional theory that the dollar actually strengthen while markets went up as well. So it is not always that this theory holds. My broad view is that the dollar might strengthen a tad but I do not see huge strengthening move. It may well be that the relationship may not hold in that. If the dollar actually does not strengthen what that does is, and let us say on the other hand it weakens, what that will probably do is it might push inflation argument back to the fore. Therefore, rates will follow in the whole reversal of the cycle. That is not going to be good news for the market. So the global economy is still very fragile and the last thing any country can afford is a resurgence of inflation.

Therefore, no economy in the world, that I can think of, can afford a move to tighten rates just now. Therefore, if the dollar actually weakens and rates begin to harden then you may see equity prices begin to tumble because the dollar is weakening rather than the relationship that the dollar weakens and because of that you end up having rallies in equity markets. So maybe this relationship is due for a break because all of us have become too cozy even in assuming that this is a way the trade actually works out.

Q: What do you think about this whole Reliance settlement issue, do you think it is likely? What is your own position in First Global on the Reliance stock?

A: We have been negative on Reliance Industries for quite a while now. I see no reason to change that view. These occasional spikes keep happening as there is hopeful talk that the settlement might be reached and I am not an insider on that trade for me to know whether there will be or not.

What I am more interested is knowing how the Supreme Court (SC) will interpret all the complexities around this and how will a court of law get into very detailed analysis of a business problem because typically courts are into issues of law rather than get into what is the cost of producing gas and stuff like that which even we analysts cannot figure out. So let us see how the SC takes this but I am no insider in this.

Q: What has gone a bit back of mind now is Q2’s performance by way of earnings, there were a lot of chinks over there. The only redeemed feature seemed to be the margin performance which as well maybe up for question in the next couple of quarters, what would your own earnings outlook be?

A: In light of what we have seen, it has been basically one big pack and that has been the auto pack that has truly been good. It has been outstanding in terms of numbers on an aggregate basis. Other than that, you are searching hard to justify a lot of their valuations, you are searching hard to see how incremental earnings growth will come through, if you look at the whole fund raising pie chart from the lows of March, it has gone to companies––infrastructure and realty pack––which have been at the poorest end of the market as far as business fundamental are concerned.

They have to my mind whatever little good news was there by way of their earning sequentially or whichever way you want to cut it, they just want to say that this is the only chance, let us put some numbers together, show the market that we are in good shape, let us get some capital and then we will figure out how to rework the numbers once you got money. It has been a little bit of a logic and reverse. However, companies that have not needed capital within that pack have been only the auto pack. So that has really gladdened the hearts but other than that the earnings picture was pretty relative to where the market is.

At 8,000 same earnings picture would have looked very different but at 17,000 where the markets were, this earnings number or these aggregate numbers are not going to take you to the highs. That has been my general view that the highs while tantalizingly close are unlikely to get reached or breached anytime soon even though for a brief moments, there have been moments that I doubt that is it really going to get there in November or December, etc. but on an aggregate basis, my view by and large has been that we would get a huge bear market rally which we got but it wouldn’t take us pass the highs simply because of the internals of the market by way of their marketcap weightages, hard to see which ones will take the markets higher because autos still don’t constitute much and that is the only area I feel comfortable about.

Q: What do you do with high beta now? Do you short that, do you stay away from it? How would you position yourself in that trade?

A: I never short anything at all, not in India anyway.

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Src: Moneycontrol.com
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