India will be the best or among top two markets globally: Shankar Sharma

We romanticise the good part of the markets, ignoring the bad part, says Shankar Sharma, founder, GQuant Investech

Every market has its day. The Indian market, too, is having its day, underpinned by having done better than the rest of the world during a problematic 12-month period, said SHANKAR SHARMA, founder, GQuant Investech, at the recent Business Standard BFSI Insight Summit 2022. Edited excerpts:

How would you characterize the current state of the markets?

Indian equity markets are playing a catch up with global markets. Between January 2008 and February 2020, the Sensex gained around 16,000 points (from 21,000 to 37,000) over a period of nearly 13 years. That is an annualised CAGR return of 4-5 per cent in rupee terms.

In dollar terms, the returns were slightly negative. However, Indian markets have delivered fabulous returns since Covid (March 2020), after delivering abysmal returns, in dollar terms, for nearly 12-13 years. We have to understand that it's a cyclical catch up. 

We romanticise the good part about the markets and ignore the bad part. But, we are going to get both parts over a period of time. Every market has its day, and we (the Indian markets) are having our day, which is underpinned by us having done better than the rest of the world during the very problematic last 12 months. 

Why do you think that happened?

India always does well in a global economic crisis than others. There is a different reason for that, which is that the 1991 crisis taught us a lot of things on how to make a national balance sheet, at least foreign exchange, bullet-proof.

How do you see Indian markets now?

The building blocks of India's current situation were laid in 1991. Again, coming out of the crisis which taught us a lot of things. And every successive government, irrespective of who has been there, the leaders have been very focused on not shaking the foundation of that knowledge. 

Overall, it is hard to find a country which is ticking all the boxes as India is. No investor is betting on Japan. Taiwan, being a tech-heavy country, will have its global cyclicality based on the semi-conductor market. Closer home, China possibly has vast unknown problems. Europe appears to have no future, expect for being a vast tourist destination as the block isn't keeping pace with changing times as far as tech is concerned. 

What about the US?

Over the past 30-years, the US has been the number one market – heads and shoulders above everybody else. The US has a huge plethora of choices in terms of sectors, companies, and the technological edge. But after that, we just have India as the only good option available.

How would you evaluate the positives and negatives of India and China?

One of the biggest positives for India is that it is the 'good boy' of the world. People may do business with China, but they don't like it for a variety of reasons. On the contrary, people trust India and Indians a lot more. We have, generally, been a well-behaved and a model student in the world economic landscape – and we will get our rewards for being that ‘nice guy’. This is our chance to finish first, rather than finish last, as we have done in the past. 

Do you think businesses will shift from China to India?

I think there is a genuine shift of businesses from China to not just India, but other neighboring countries as well. However, Vietnam, for all its goodness, cannot absorb that kind of capacities. They cannot go to that level because of the sheer size and the availability of labour, that India, at least on paper, has. We have a lot of labour and land. No other country offers itself with those advantages. That said, being a democracy, we are slower in decision making. That's not always a bad thing. 

Are there any negatives for India? 

I don't think there are many negatives. One of the key differences between India and China is the level of debt. One must remember that huge levels of debt come home to roost. And China has accumulated huge debt – be it at corporate level, provincial level or state level – to fund its growth. India, meanwhile, has manageable debt levels at all levels.

Do you think the sentiment in the Indian markets will get impacted if there were further flare ups in geopolitical tensions?

The Russia-Ukraine crisis seems to be fully priced-in by the markets. We know that European demand has been affected and it'll take a while to come by. As regards our borders, I don't think the stock markets gets affected if the confrontations don't escalate into major skirmishes. 

How do you see the Indian markets in the next two to five years? 

My view is very clear and unequivocal that India is going to be easily the best and (among) the top two performing markets in the world. And while we have outperformed global peers over the last one-two years, it was not always the case. We had a lost decade before that. It is important to understand that cycles of this kind are durable either way. So if you go into a bear market, on a relative basis, it will take a while for large economies to come back. And India’s still a fairly large economy by any standards. When it turns and it goes up into an upcycle, it is like a super tanker. You cannot just turn them around and make them bad. 

How long will this optimism last?

Relative to the down period, the succeeding period of upturn is, at least, 50 per cent of that period. So, in that sense, the good times for Indian markets will easily last for five years. It was a seminal moment for the Indian markets in 2020 and that's when our (next) good period started. We made a break from the previous 10 years, even 12 years of underperformance. India is on a good wicket now. The pitch for India is flat, the ball for India is old, the sun for India is out, and the bowlers are not bowling too well. I think only we can get ourselves out. 

What could see us get out hit-wicket? 

In markets, index fund managers have alpha which is the excess return they generate (for their portfolios) over market returns. A government's alpha is its growth rate. However, a growth rate of 6 per cent is par for the course. India's alpha will begin after 7 per cent growth. Consensus view suggests that India may grow at 6 per cent in the next financial year (FY24). It’s not terrible in context to the world, but it is not earth shatteringly good either. We need to grow faster. Funding that growth is the key. 

What can expedite the growth?

Things get tricky here. India has, traditionally, been a very conservative country after the 1991 crisis. It hasn't raised much debt to fund growth. Moreover, you recently announced corporate tax cut. But again, debt is a problematic thing. Once it expands beyond a point, it is hard to rein back.  We need to be careful about this. 

What about exports?

Exports can't be our levers of growth. Your two biggest markets are Europe and US, which are facing slowdown. We don't export much to the Asian countries. So, weak net exports will impact our gross domestic product (GDP). The growth, in my view, can be supported with low interest rates.

You think the time for a pause has come?

I don't believe in inflation. It is merely a rate of change, which will eventually come down or get tamed by the passage of time. The Reserve Bank of India (RBI) should not have raised interest rates in the first place. This was the mistake the former RBI Governor Duvvuri Subbarao made in the United Progressive Alliance (UPA) era. By raising rates, we don't solve anything. A major part of the (current) inflation basket is not rate sensitive. So, you end up hurting growth without inflation getting impacted. 

... But inflation is a politically sensitive issue...

You can't be doing things just because you have to do something. Somebody has to - someday - stand up and say what we are doing has no effect on the villain (inflation) we are trying to kill. Because we ended up killing the hero (growth). 

Does this mean we have not made much efforts to revive demand?

I don't necessarily agree the government has not done enough on demand stimulation. But, the government also has limited bullets and one needs to fire them wisely. That said, our twin deficits are in double digits. The government does not have unlimited money to spread around. The worst thing we can do is to start copying the United States in terms of fiscal profligacy. They trade in dollars and India in rupees. We can't copy a rich man's game and hope to survive on that.

What are your expectations from the upcoming Union Budget 2023?

I hope the government doesn't tinker either long-term and short-term capital gains tax rate or holding period of asset classes. Once the door to a tax revision is opened, it never goes back. The equity markets have been buoyant and the government needs good equity markets to do a lot of the things. 

Do you that the government should return to its part of fiscal consolidation?

It should, but I don't think it will. This is because: a) we are entering an election period; and b) we have a 6 per cent growth year coming up due to factors like the Ukraine-Russia war and local macro challenges. I think the government will expand its balance sheet next year (FY24).

What role does politics play in the markets?

In a developing country like India, politics has a very central role as far as stock markets are concerned. In a growing economy like India, as long as politicians behave responsibly, the ride is smooth. And we have been lucky to have had a series of good leaders in India, including the current one. India has always had good leaders who are responsible, in every sense of the word.

Will it be correct to say that when all boats are rising, leaders do well, but when all boats are not rising, leaders don't do well?

That is possible, but the true test of a captain is when the boat is sinking. Does he jump off or does he try to save the ship?

What keeps you happy?

Good health

And what keeps you worried?

Loss of wealth

And what makes you satisfied?

When I play with my daughter.