 "'2016 will be a year of beaten-down markets, commodities'")
After their crushing last year, markets will do well in 2016, while Indian blue-chip stocks will lag their emerging market peers, says Shankar Sharma, vice-chairman and joint managing director at First Global, the global full-service securities house. In an interview with Samie Modak, he says the potential spike in global commodity prices pose a risk to the Indian market. Edited excerpts:
Indian market has gained more than 10 per cent since March. Do you think there is more steam left in the ongoing rally?Read more from our special coverage on "MARKETS"
We turned bullish on equity markets, industrial commodities, specifically oil, in the middle of February, post a brutal January. Our thesis was that there was extreme pessimism around emerging markets (EMs), oil and commodities, and extreme optimism around the dollar. Those are classical turning points. From a global macro trade point of view, this year belongs to commodities and commodity-rich markets like Brazil, Russia and Mexico.
Are you seeing any signals that point to a revival in the domestic economy?
As far as India is concerned, we are in a muddle-through mode. Neither great, nor terrible. But, relative to the hype, and 'management guidance' by the management of the country, the numbers are stunningly underwhelming, especially with oil prices coming off 60 per cent from their highs. Mark oil back to $90-100 a barrel and the performance appears even more abysmal. Our concern is what happens if oil goes back to $60-70 a barrel? What happens if there is a global bull market in commodities, as seems likely? What happens if agricultural commodities rally, as they probably will because of weather patterns being disturbed? Where does that leave our inflation and, hence, rate policy?
The call we are making is: Inflation probably nudges back up over the next 12 months, on the back of a global commodities rally. That will present major policy challenges.
What is your reading of what is happening globally?
We firmly believe this year it will be beaten-down markets and asset classes that will do very well. And, that's all things commodity. We also don't believe the US Federal Reserve can hike up to one per cent as targeted. That's again good for beaten-down assets. Overall, the situation remains troubled globally but, then, that's been so case for years now.
Is the Indian market no longer the most attractive in Asia and among EMs?
In our view, this year, one is better off buying Brazil, Russia, Mexico and even China. They were crushed last year, while India was flat. The trade has moved away from India to these erstwhile pariah markets. That said, we remain maximum bullish on Indian small-cap and mid-cap companies. They represent the single best asset class globally within the equity space. There are some terrific stories out there, if done right, representing 100 per cent per year opportunities.
Last quarter, India saw one of the highest number of downgrades in Asia. Are more downgrades likely? Are earnings expectations still high?
All analysts remain in La-La land, starting with 17-20 per cent earnings growth, and ending with five-seven per cent. With nominal economic growth at five per cent, how can earnings on an aggregate basis grow 17-20 per cent?
How much more upside can one expect from the Indian markets this calendar year?
I think we have some upside but, on a relative to EMs basis, India large-caps will probably lag. However, small-caps will be on a tear this year, too.
Which are the sectors or stocks in India that look attractive?
We like beaten-down commodity companies, chemical companies. Select infra companies, automobile ancillary companies all look good.
