The mother of all bear markets in equities is dead: Shankar Sharma

We have mastered the art of neutering the 'bear market villains' - speculation, inflation, war, disease - we have dealt with them all, Sharma said

Developments in West Asia have triggered a panic-like situation across global equity markets. Puneet Wadhwa caught up with SHANKAR SHARMA, founder, GQuant Investech in New Delhi on his interpretation of the developments. Investor’s focus on China, he believes, can spoil the Indian equity market party. Edited excerpts:

A war, you had recently said, has the potential to trigger a bear market in equities. Do the recent developments in West Asia have that potential?

Well, a nuclear war can surely put equities in a bear phase. I don’t think that the current developments in West Asia can. The mother of all bear markets in equities is dead, only the children are alive, which do not have the potential to put equities in bear territory. There can be small disruptions, which can at best trigger a small correction in regular intervals.

 

We have mastered the art of neutering the ‘bear market villains’ – speculation, inflation, war, disease – we have dealt with them all. In short, we can deal with Pran, Prem Chopra, Gulshan Grover, Do. No. etc. The hero (bull market) always triumphs in the end.

What’s your reading about China now in the backdrop of all the stimulus measures? Can China spoil the Indian equity party?

It can do so, and there are no two ways about it. In the last 2 – 3 years, there was no challenger to the Indian equities in the Asian / emerging market (EM) context. Now, we have Chinese markets. One must realize that China is no small market. In the backdrop of the stimulus measures, it has added nearly $3 trillion to its market capitalisation, which is a significant portion when compared to the total size of the Indian equity markets. And, they have added that in just one rally! It is a giant market and will make investors consider China, which was not the case 2 – 3 years ago. The needle is no longer aligned only towards India now.

So, what will make Indian equities get back their mojo?

I am not saying that the Indian equities are completely out of reckoning. They will remain important and the mojo is not completely lost.

Can the fall seen in the Indian equities in the last few sessions due to developments in West Asia prolong further?

I don’t think that the world will allow the tensions in West Asia to escalate further. There is too much risk involved and there is too much at stake. It is better to call off the game now. The fall in equity markets is a temporary phase. That said, the problems with Gaza are very much there and there has to be a solution to it.

For investors, valuations of the Indian markets till now were a deterrent. Has the fall made the Indian markets juicy enough now for foreign investors to put in money?

The Indian markets have not fallen enough to correct valuations. The fall has just been around 2 – 3 per cent. The markets were trading at around 22x forward earnings, which are in no means cheap. Indian markets will cool-off more in the immediate future as China hogs the limelight. I don’t see the runaway madness in Indian equity markets that we saw in the last few years. That said, we will not see a bear market, but a cyclical slowdown. A bear phase is ruled out.

So, a flash correction then?

Precisely. A bear market is when a stock or an index slips 20 per cent or more. Now-a-days, the fall is sharp and the pull back is swift. Done and dusted in a matter of just 4 – 5 days. In a nutshell, I don’t see a threat to the Indian equity markets, but a slowdown.

Retail investors seem to have found a new playground – the primary markets. Are the primary markets now a threat in terms of liquidity to the (once) thriving small-and mid-cap segments we had in the secondary market?

Well, there are a lot of crazy companies with no or insignificant fundamentals and crazy valuations often hitting the primary markets. We have seen this earlier as well. I did so in 1996, and things ended badly. But a lot of investors have matured since then in the way they invest.

Talking about 1996, you were one of the first research houses that spotted HDFC Bank and recommended a ‘buy’ on their initial public offering (IPO). Do you find any companies that are hitting the primary market now that have similar potential?

HDFC Bank is a different kettle. It was a par or a near-par issue. Most IPOs these days come in with a significant premium and/or leave nothing much on the table for the investors. We did not have free pricing back then as we do today. A company that is good will come in at a significant premium. This limits future gains. An IPO like HDFC Bank is like hoping for another Sholay from Ramesh Sippy.