Shankar Sharma, chief global trading strategist, First Global, expects inflation to moderate as the central bank cuts policy rates by 150 to 200 basis points this year. Edited excerpts from an interview with Puneet Wadhwa.
It has been a disappointing couple of months for the global markets, including ours. What’s the road ahead, given the recent economic data from the US, China and the upcoming Greek elections?
The world economy is close to stalling, as there is slowdown across the board. I don't see a real way out for the indebted nations of Europe. I am also very bearish on China’s prospects. Years of profligate spending has left China with a very high debt / GDP (gross domestic product), already at dangerous levels. There is also no room for a fiscal stimulus.
Do you think the US economic data points are a temporary blip or is the economic condition turning worse? How high are the chances of a third round of quantitative easing (QE3)?
I don't think any amount or rounds of quantitative easing are going to help. The only option is to endure a prolonged period of negative growth and low spending. I am surprised that economists like Paul Krugman are now on the anti-austerity bandwagon, despite being on the anti-profligacy bandwagon prior to 2008.
Do you think our economy has now entered a state of stagflation, governed by high inflation and slow growth?
India will grow at 6.5-8 per cent in the next one to two years. Despite all its problems, India's growth model is way ahead of that of China, Brazil and Russia. Our government may have done major blunders like the Vodafone tax issue and the General Anti-Avoidance Rules (GAAR), but somehow the markets have taken all this in their stride. Inflation will moderate as global commodity prices are now in a solid bear market, and the RBI will have to cut 150 to 200 basis points (bps) this year. The consumption story is still strong.
I am least bearish on India, in an overall very, very bearish outlook for the global markets.
How much room is left for RBI to cut rates?
There is ample room to cut rates. The growth is sharply lower and inflation too, will ease off, as I mentioned earlier. The drop in crude oil prices and the 50 per cent lower gold import number will mean that the rupee could be in a range of 44 – 46 by the year-end. The current account deficit may also shrink sharply this year and subsidies will be lower because of lower commodity prices. All these should help the central bank tinker with key rates, which it should now do aggressively.
Which sectors are you overweight and underweight on at the current juncture? What is your view on banking, metal and consumption-related spaces? How should one re-balance their portfolios now?
One can take a long position in autos, banks, consumer durables, infrastructure (JP Associates, L&T) and pharmaceutical sector stocks. Avoid metals and telecoms. Among individual stocks, one can also avoid Reliance Industries for now. As regards re-balancing the portfolio, I suggest one keeps 40–50 per cent of their money in equities now (I was at 30 per cent earlier).
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A lot of thematic and news-based stories have come into play recently, such as IGL, oil marketing companies, etc. How should one approach these stocks?
Of this lot, one can look at buying oil marketing companies (OMCs).
Have you tweaked the earnings estimates for corporate India, given how the rupee, crude oil and inflation may pan out for the rest of the year, and probably in Q1FY14? Do you expect more downgrades over the next few quarters?
I think most macro indicators have bottomed out. As I said earlier, we see oil between $65-75 and the rupee at 44–46 against the greenback. In my opinion, India will outperform all other emerging markets (EMs) vastly, including the major developed markets.
