Indian equities have been hammered over the last couple of months amidst global volatility. (Photo: PTI)
Indian equities have been hammered over the last couple of months amidst global volatility arising out of the confusion around the US Fed hike, China recession fears as well as disappointment over domestic economic data.
IANS spoke to Shankar Sharma, vice-chairman and joint managing director of First Global, for his expectations from the upcoming RBI monetary policy announcement and the impact of the Bihar elections on the markets – as also to get his thoughts on the current global macro trends. Sharma is one of Dalal Street’s most respected voices and, more importantly, a man who has proved very accurate in calling major turns and inflection points in the markets over the years.
Q. We last spoke shortly prior to the budget session. You expected a short term correction but were bullish on India for one reason alone: a sharp fall in interest rates. Do you think Raghuram Rajan has done enough in terms of monetary easing? What are your expectations for September 29th RBI meet?
A. My position remains the same: the sole reason to buy India is a view that rates will come down dramatically over the next 2 years. If that’s not your bet, then you should not be looking at India. If you are coming to India to buy growth, then it’s going to be a long wait. So India is a pure cost of capital trade. And I expect RBI to cut rates in the September 29 meet.
Q. How are you reading the domestic inflation dynamics currently? Do you attribute the fall in prices to the Government policies or it is totally function of collapsing oil prices?
A. It’s in part due to oil. But it’s also due to not raising minimum support prices (MSPs). I don’t think monetary policy has contributed much, if anything at all, to lower inflation. However, bear in mind that not raising MSP has had a major negative fallout by increasing rural misery massively.
Q. Which structural reform undertaken by the Modi Government can help revive a cyclical recovery in India’s investment cycle?
A. If they start spending big time on infrastructure building, that will propel a cyclical recovery. However, that eventually may lead to over investment, as has happened elsewhere in the world. And that leads to a sharp increase in the Debt/GDP, which the pre government managed to bring down substantially to 67 per cent of GDP from 87 per cent in 2004.
Q. You think the upcoming Bihar elections can set the tone for the Nifty? Does a clear BJP mandate in Bihar lead to a big rally?
A. If at all there is a rally, it won’t be worth buying. Think about it: whoever bought the May 14 election outcome rally, is still repenting. So why get so excited about a state verdict if it’s positive for the BJP.
Q. What are your thoughts on China? Can the dragon lead the world economy into a recession as many fear or you still have faith in a potential bazooka Beijing stimulus?
A. China has no real bullets left to use to stimulate its economy. They spent it foolishly in 2008-9 in trying to keep up with the Joneses. That was the stupidest economic decision I have seen from any government in a long time. And everybody still kept saying the Chinese leadership had a plan! We now know better. The only bullet left is a bigger devaluation of the Yuan, which I think will happen over the next year.
Q. The US Fed maintained status quo at its September meet. You think this decision was only a function of problems arising out of China and EMs or is the US Fed having a domestic growth scare as well?
A. The Fed is confused. I see no sign of inflation in the western world, so they were trying to be too cute in talking about a rate hike. I think markets will keep a gun to their head, and the Fed listens primary to the market.
Q. If US monetary normalisation works, we will be fine. But suppose it falters what next? What’s the next policy action by global central banks? Negative interest rates? Helicopter drops? More fiscal stimulus? What’s your best guess?
A. Yeah, more of the same. It’s almost comical how easy it is to predict what the Fed will do. Always has been, save for the surprise hike in 1994. Wall Street is Main Street as far as the Fed is concerned.
Q. Are you expecting more QE in Europe and Japan? Can this keep the global equity landscape cheerful even if US stocks maintain their current downtrend?
A. Look: it’s incontrovertible that despite all the QE in the world, equities have been a terrible asset class last several years. US flat over 15 years. Europe flat over 7. Japan long way away from highs, probably won’t get there for a long long time. Emerging Markets are almost at a 10 year low in US Dollar terms.
So there you are: free money, and yet no longer term returns. The whole equity story has come unstuck but again, you won’t find anybody talking about it, because equity sells papers, magazines, TV ad spots.
Q. Do you believe in the decoupling theory? Can India decouple?
A. Why do we Indians believe India belongs to some other planet? We are just another market. And just another country. We are looking good right now because of a conservative policy stand by our policy makers. Period. But to expect India to decouple and run up while the rest of the world struggles is to expect the near impossible. That said, India will outperform the global bear market, but by falling less.
Vatsal Srivastava is consulting editor with IANS.
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