Do not apply logic to market, it’s a different animal altogether: Shankar Sharma, First Global

Polarisation of large and smaller businesses has been a theme playing out both in the US and Indian market. What do you think is the reason behind this?
We have not seen any large-scale decimation in the US, leading to such polarisation. Simply a few companies have become very large, but it is not as if it has come at the expense of killing of 20,000 small business or 100,000 small business in the US. Small businesses are thriving in the US. They are big hirers, the tight job market has been the result of a very strong hiring season after season by the smaller companies, the SME equivalents in the US. That has not been the case in India.

So yes, there has been polarisation, but for different reasons. In India, businesses – large, medium and small ones – have been decimated, and hence the polarisation. There are a few companies with certain edge. Like a Google has a huge edge. It just broke up the revenues of YouTube for the first time, at $15 billion. Imagine! Created less than 15 years back, it is a $15 billion business now. They have not killed everybody else to get there.

So when do you think the headlines in India will match the markets? Do you think the economy will improve or markets will have to come down?
I do not think markets and economy have anything to do with each other. If you believe that, then I do not think you or I deserve to be in this profession. I always say this, being too logical in this business is detrimental to your health. So do not apply logic to markets. Markets are different animal altogether.

Talking about growth, the one big takeaway from the Budget is a straight-forward message: do not bet on India becoming a 7-8-9 per cent growth economy any time soon. Probably not for a long-long-long time to come. That was the unstated but pretty clear message in this Budget. As a corollary, the other message is: get used to these kind of sub-5% growth numbers. If the growth rate increases, it might increase for factors other than the government’s doing.

So maybe, some global tide comes and lifts this boat. But otherwise, the government is not going to go after growth, and in the process breach the fiscal discipline or whatever goes under that banner, any more and risk a rating downgrade. All the corollary things of going to 4.5-5 per cent growth, is actually more than that. I am just talking the optics of it, the government has very clearly told you look we are not going back to even 7 per cent growth. It is perverse with throw good money after bad. So forget stimulus, forget pump priming; we are not going to do that. Get used to 3-4% growth. In reality it is probably closer to 0-2% based on the high frequency data. That is what you need to adjust your targets too.

Let us work with an assumption that forget 7, even 6 is going to be difficult to achieve barring some base effect which may kick in in some sectors. So what happens to the market then? Are we going to see same 15, 20, 25, maybe 30 stocks do well because those are the ones which will grow, because they have survived?
Exactly. So the pie would not grow. Within the pie, a re-arrangement will happen. That is exactly what I was saying five minutes back, that I do not think the pizza is going to grow from small or medium to a large one. The government has told you very clearly, “hey! do not bet on that happening. But I have brought in an IBC, through IBC you can re-arrange the pizza.”


When I started eating pizzas for the first time, it used to be tomato sauce and capsicum. Now we have migrated to truffle sauce, and other delicacies as pizza’s toppings. So how do you see the pizza toppings changing there?
The toppings are your seven-eight Nifty stocks for sure. People are happy to pick that and call themselves fund managers. Frankly speaking, I do not see if all you have to do in office is pick eight or nine stocks and I do not think it is a full-time profession anymore. In my view, I do not need to spend as much time as I had to spend 25 years back doing this, when there were literally three-four-five hundred companies to pick from. Now it is down to handful of 120-130 companies, and you got to be a dumb to really get that wrong.

When do you see that changing?
There will be good companies at the bottom, which will come in through listing and otherwise. But large companies because of the economic distress are going to keep becoming larger at the expense of the second, third, fourth, fifth guys in the same industry.

You have always been a big votary of mean reversion. You have always said nothing goes one way. This trend in mega caps has lasted a couple of years now. What is the end game?
I do not see that changing in a hurry. Again, remember one thing that we in India say is, there is something very special about this country and that it does not deserve to be treated on par with others. I do not why that is the case, because I do not see anything which is extraordinary about this country. You go to other countries, the people are more realistic.

Last year in 2019, India was a terrible market. Nifty was up 8-9% or something like that, the Nifty500 I think was up only some 2-3%. But globally, we are up between 40-60% and I am talking not buying stocks, I am talking buying a Brazil, buying a Russia, buying sovereign bonds, buying gold.

Why are we just looking at India as the ‘be all and end all’ of everything in investing? There is a world out there. You can make tons of money. These 10 or 15 stocks are not the real barometer of the country; the real barometer is your Nifty500, and that is not looking good, that has been hurting for last two or three years. Calendar 2018 was a bad year, a down year, but 2019 barely broke even and in 2020 the only thing I see changing is that the broader market has become so beaten down.

This is why you are seeing a bit of a catchup rally in the last month-and-a-half, where Nifty is down 1-1.5% but smallcaps are up roughly 10%. So there is value in the broader market, but it is nowhere going to be a broad bull market the way we used to have in the past. I think those days are probably gone forever.

So to imagine that we will get double-digit returns in the next couple of years would be hard? You think making money would be difficult?
Buying broadline indices, I really doubt. You can possibly get that by working hard and figuring out, maybe 25-30 stocks or 40 stocks. Calendar 2018 was a terrible year, when midcaps, smallcaps got crushed 25-30%. If that happens, then you are not going to make that money. But I am just saying there is money to be made, but not the kind of money you make in a broad bull market.

What is keeping you busy in market these days? What has been your tone of activity?
We are very busy. We look at everything in India and across the world. We have had actually a good 2019. So in terms of the India products, they delivered between 11 and 19%. January was very good at 9%, so we will take that. I do not think we can do 9% every month; it is not going to happen. But globally we did phenomenally well which is what my point is. That we need to tone down expectations on India because when you enter the equity market, you start with an assumption that you want to make 15-20%. In reality, you have not made anywhere close to that in last five years. Just 7% is your compounded return from Nifty in last five or six years.

And if I put in the currency angle, does it get worse?
Currency? Forget about it. We are not even talking 0%, so it is like less than 1%. Even in nominal rupee terms, 7% on your FDs and government bonds, G-Secs yield you 6-7%.