Shankar Sharma, vice-chairman and joint managing director of First Global Group, has a clear view of the stock market boom. He says the sharp dip in global oil prices and its role in lowering inflation is the sole reason for the hype. In an interview, he tells Lola Nayar that nothing has changed fundamentally after the 2014 elections.
What is driving the stock market and how long do you expect this bull run to continue?
The sole reason why the stock market is up from 22,500 around election time to about 29,000 now, from a purely fundamental perspective, is that crude oil is at $45. The rest are all non fundamental and emotional factors that people use to analyse the market.
Oil at $45/barrel changes a lot of fundamentals for India. It changes the price of government borrowings. It changes long-term bond yields. It changes our current account deficit. It changes the inflation outlook. Therefore, it changes the interest rate outlook. In short, it has puts India in a place it has never been before. India has always been a chronic inflation-ridden economy, because oil has been a big problem. Also because there are too many mouths to feed and our productivity has been low.....
There are expectations of the stock market scaling beyond 33,000. How realistic is that expectation?
Because of oil prices, the WPI is at 0-0.2 per cent and the CPI is a bit higher, which has never happened on a sustained basis. Long term history of WPI is at 7 per cent. Broadly the stock markets are linked to the interest rates - the trend has been that when interest rates go up, the stock market goes down and vice versa. Equity markets worldwide have run up hugely because of the zero per cent interest rate policy in major economies. It is not as if global growth or global economies are doing well. In fact, across the board they have been doing badly, whether China, Japan or European Union or even the US.
They have all been stuck in low economic growth since 2009. But they all have low interest rates. Nothing fundamentally has changed in those countries to merit a high stock market. India is in an identical situation. Fundamentally there is nothing that has changed for the better yet, in terms of growth data. The only thing that has changed is that inflation and interest outlook have moderated significantly and that too not because of any man made action but because of god made action which is low oil price.
Our 10 year bond rates are way too high at 8 per cent whereas globally they are at 50 basis point or 70 basis points or 1.5 per cent. India is a big outlier. We cannot have bond rates at 8 per cent incrementally: bond yields here have been high because of high inflation, which leads to higher interest rates. Once inflation moderates sustainably, the 10-year bond yield should go back to 5 per cent over the next two to three years. The moment that happens, the stock market will go up, irrespective of whether fundamentally anything has changed for the better or not, as has been seen globally.
The days when economic performance drove stock markets are long gone. Now, market performance is only a monetary phenomenon, not a policy offshoot. We should not confuse high stock market levels with any great policy action or a great government, anywhere in the world, India included.
Which sectors and stocks are the FIIs and equity investors looking at to park their funds?
The same four sectors that drove the bull market during the two tenures of Manmohan Singh’s government – pharmaceuticals, automobile, FMCGs, the banks. These are the same sectors that have driven the bull market post NDA government coming to power. You cannot say this resurgence has anything to do with the election verdict as the same stocks, the same companies and the same sectors are continuing to do well.
What nobody wants to say is that sectors that were expected to do well -- like power, metals, infrastructure, real estate – have all been decimated post the new government being voted in. The expectations were that the government policies would benefit them and help grow stocks of these sectors. Ironically, stocks of some companies in these sectors are lower than they were before the elections. As always, the market is hiding more than it reveals.
Do you expect any reversal in FII inflows in the event of a rate revision in the US, expected later this year?
There is something very interesting here – 2014 was actually a very poor year as far as FII inflows are concerned. Even in 2009 we got more money. The data shows that foreigners have not been very bullish about India in 2014. We got around $16 billion in equity while the inflow into debt was $24 billion – that in my book does not show bullishness. The $16 billion is not a high number in equity as we have seen it in 2009 and 2010.
Do you support the UPA’s economic policies or the NDA’s?
I am only a supporter of good economics, irrespective of which party does it. In our business, political views should never intrude upon clear-headed analysis. The ten years of UPA have been transformational, but that is something nobody understands or appreciates, and I am not sure even many in the Congress understand it! UPA-I had a fairly easy time in the first three years, during which there was a global boom and India also boomed. But all that changed after 2008 when it had to battle a savage global situation.
My respect for UPA's economic management increased only post-2008. India grew 7.1 per cent during 2008-2014 - the revised number will show up 7.5 per cent, which was phenomenal growth. What is more important is that India is the only country in the world that grew over 7 per cent while reducing its debt to GDP ratio during that period, with just 7 per cent WPI inflation – something any corporate manager would have been proud of.
Growth is not an absolute number. You have to see how you achieve it. If you do it while letting your debt grow as China has done, that is not good economics. Sometimes, a fighting 80 on a beastly track is more important than a 200 on a feather-bed. The funny thing is that all economists, analysts, intelligentsia, who have severely criticized the UPA’s policies, have no answer when I ask them: show me even one country since 2008, which has done better than India on the growth-risk matrix. There are none.
But it is as if all these so-called thinkers expect India’s to belong to some other planet, wherein we have 9 per cent growth, with no debt or inflation, irrespective of what’s happening in the global macro environment. This desire for some sort of macro exceptionalism for India is childish and puerile. We are a large economy and to a large extent, global macro conditions will determine our own economic performance. The NDA government is as well intentioned as Manmohan Singh's government. With luck smiling on it via low oil prices, and improved efficiency because of speedier decisions, I am sure India's economy will continue to do as well as it has done since 2004. Hence, I am very optimistic on India and its consumption theme.
This web-exclusive interview does not appear in print magazine.
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