Shankar Sharma investment ideas: Real economy in bad shape; don’t get romantic about this market rally: Shankar Sharma


A lot of opinion makers had classified you as bearish but you are saying look, I am not bearish. I believe in seizing these opportunities whenever they come. You saw one opportunity, I believe, two weeks ago when you publicly went on record and said that you expect a sharp bear market bounce. So what is your understanding now? Is this as good as it gets or this rally has legs to perhaps expand a bit more?

First and foremost, only idiots think I am a bear. As I have always said, I play both sides of the spectrum and I like to believe that you cannot just be one trick pony and make money or survive in the markets. So long-term survival depends on playing both sides of the trade. So in February when we spoke, markets were not looking good, they continued to be bad in March. On April 1, we went all 100% from being on the sidelines to 100% invested in India; of course, globally we were in the middle of March itself and I tweeted about how we went into virtually 80% invested. So we are riding this rally; we are not sitting it out. We are not feeling bad about it. We are feeling very good about it. So that is the strategy part.

To answer your question if the worst is over, it might well be for certain stocks in India; it might well be for certain stocks globally. But to say it is over for broad markets is being a little premature and probably being a little foolhardy. Remember 2008 again a good case in point. People now have compressed the entire 2008 or 2009 bear market into a big fall and a V-shape recovery and I keep telling the guys that V-shape recovery took 15 months to play out; so it was not a V at all. So we had rallies in March, April, June, July, October, again in January and then finally it began in April; in then those periods you could have gotten suckered in and would have had bigger losses than just riding the 65% down markets.

So to answer your question, if the worst is over, I do not think it is over for India as an economy. I think it is definitely over for certain pockets of the market and it is definitely not over for other pockets of the market and some of those pockets are not doing well today. If you are not doing well today, that itself is telling you as to where the problems lie and I do not need to spell it out for you.

The current investor has the risk of losing money and risk of not participating. So what is the bigger risk for an investor right now?

It depends on how you navigated February and March. If you managed to contain your losses. Everybody will lose in these markets; so it is only how little you lost. If you lost very little then you definitely have to be participating and that is what our strategy has been because we have lost very little in the big fall. So we went in because we had the firepower but if you are down 30-40% then you just simply do not have the guts to participate. So like I said there are pockets in the market where the worst is over.

So, say for Cipla, will it go back to the lows? Probably not. Is it over for a handful of banks and NBFCs? I think the worst is ahead of them and not behind them. So we are as clear as it can be that you will not have a uniform bull market or for that matter I do not think we have a bull market at all. India has been in a bear market this year itself. It has been the worst performing market barring one market. When you have fallen vertically, you will have vertical rallies. You will have it. What we are seeing is a vertical rally in what continues to be overall a bear market for the last two years; nothing has changed there. But you should play it? If you are smart, if you are nimble, if you are a hare, you should play it. I doubt many people can do that but if you can do that there is no harm in getting into these. I think I can still see maybe another 4-5% upside to the markets from here on as well.

But do you think 7,500 will act as a big base for the market because that is the point from where markets have really made a comeback?

Markets may come back. One law of the market I can tell you right now is that vertical rallies need not be followed by vertical falls but vertical falls will always be followed by vertical rallies. If there is one absolute law in this market, this is it. There are many other laws but they vary. This law is a given. We have had a vertical fall, we have had a 30-35% fall in a matter of 30 days. Do you expect markets to not go down 50% from there on? They will have very sharp corrective rallies which is exactly what we are seeing right now.

I do not want to read too much into it because I see a lot of pain ahead for a country like India and those pains get tapered over on days like this but they exist; job losses exist, bank defaults exist, EMIs getting defaulted exist. Those are real problems that are not going to get solved by a 3,000-point Sensex rally. So markets are different from the real economy. The real economy is in terrible shape and it is not coming back in a hurry. It was already hurting even prior to the coronavirus crisis. It has gotten even worse. So we should play these rallies but we should not get romantic about them.

You have always made this point that markets are separate from the economy. Yes, in the long term, we may talk about markets being the reflection of the economy but in the short term, those correlations do not exist. Since there is no IPL this time, let us talk about cricket terminology. In this market, which are the pockets where you think one should bat on the front foot and where do you think one should really avoid those pockets and those are tough balls to really handle?

What is to be avoided is very straight forward. Again on January 1, we tweeted that banks were a crowded trade and everybody obviously believed that they would continue to be so. Normally this can continue but they have collapsed and they have collapsed for a very valid reason and it’s not better for the NBFCs, which are the step-children of the overall lending business in India. So what is going to happen for banks or any other kind of lending company is that you are going to see a large scale cut on your asset values. I mean, you can take any number. In good times, you are lucky if you get those 5%. In these times, you are looking at 10-20-30% cuts on the quality of your assets. When you have that, you have net worth wiped out several times over for a number of financial institutions and that is the reality. I mean if you do not see that, then I think you are just simply not reading the data. So if that is true, then that is very obviously the space to avoid. It will again have sharp rallies because the leverage play will always rise, rally quicker than in an unleveraged company. But that is not the area at least we or I want to be positioned in. So there are other pockets of the market.

We have liked chemicals. You can see the screen today. They are all doing phenomenally well. There are other areas alike to those kinds of sectors. They are doing well. We will stick around there. We will not get praised right now. So to answer your question on this, this is a market to play in the V. This is not the market to place square of the pitch shorts.

Would you add pharmaceuticals as well to the list of preferred buys right now? They seem to be in the limelight for the right reasons so far. Again, it’s a very fluid situation; you do not know how the equation with the US is going to pan out but it’s seeing a strong trading rally nonetheless?
Yes. So we have a lot of pharma in our portfolios. So we are playing this and remember, it is not just about India. Globally, too, pharma stocks have done very well in the last couple of months. So it is more a part of a global move towards pharma because obviously when you have disease, then you need a solution and that solution can come only from pharma or even from testing and diagnostic kind of companies and globally those kinds of sectors have been doing well including in India. So I do not see the Indians thinking any different from what is being played out elsewhere in the world as well. It is part of a big global rally in pharmaceuticals.

I think this will sustain because I do not think this problem of the virus is just going to go away very quickly. This is going to take some time to go back to normalcy. I cannot even see when things will really become the way they were in January. I do not know whether you guys see that. At least I do not see it. So everybody will be trying to find a vaccine or cure, which means there will be news flow in the sector. News flow is good for this sector. So it is a very good space for sure.

What would you avoid then? What do you think is not going to be able to resurrect itself in a hurry?

Anything with leverage, you want to be absolutely away from. Exactly the same thing that happened in 2008. So basically what fell were the banks and infra because those two had leverage. Autos also fell but they recovered because autos usually do not have leverage. Right now obviously you do not want to be in. You do not want to be in industrials. You do not want to be in even I would say mutual funds because those kinds of businesses as somebody was telling yesterday that a lot of SIPs are getting cancelled because people do not have their salary cheques.

So imagine this is like a domino effect for anything to do with finance. So your EMIs will get defaulted. Your SIPs will get cancelled. Your bank loans will get defaulted. I mean that is the reality. I do not want to sound alarmist but talk to people and you will hear pretty much the same thing.

I was just going through your tweets and the last one says asset allocation sahi hai baki sab dimaagh ka dahi hai. As humorous as it may sound, what is the rationale behind this one?

If we just look at this year, gold has done so well. Government securities have done so well. Equity has been terrible but the problem is, people just keep parroting one simple line: equities, equities. Equities are good but they are not always good. And if you are truly interested in preserving your clients’ assets and wealth, then please start talking about things which are away from equities also.

I know we all have vested interest because we all get paid more when people buy equities. That is all where our bias is and vested interest but at some point, you have to think about the client also. So if you think about the client, then you need to advise them properly that the pie chart cannot all be equity and that is exactly what has come through this year. It does not come through in a hot roaring bull market but in situations like this, you end up seeing a value of that.

I mean one of our funds is up 3.2% this year. I mean this is not up 25% but it is up 3.2% and there is a market which is down 25%, so we will take that. That is exactly what I am saying: you need to get the asset allocation right; otherwise you are always the vagaries of the bull market, bear market.

Most investors do not have the skills to navigate such situations. Even professionals do not have the skills. You have seen the numbers from all mutual funds down 30%, 32%, 29%. When you as a professional cannot manage this, how do you expect a retail investor to get into equities and make any sustained money. So at least think of that guy once in a while.

So are you saying that for Indian investors, it is high time they should look at gold, real estate and other asset classes? What would you recommend? What should the pie look like for Indian investors right now?

In India unfortunately the choices are relatively limited but of course then you know what not to do. I am not going to be buying any corporate debt. I am not going to be buying any real estate plays or real estate debt. Those two are out, which leaves you with basically a pie chart which has equity, which has gold, which has government security. How you go within this is really up to your skills or your fund manager skills or your adviser skills but broadly that is the pie chart and if you look just this year, the other two pieces have done very well and gold in my view, given the outlook on the rupee which I think does not look particularly strong, gold by natural extension looks very-very good. If rupee goes to 80, gold is looking good as it is in dollar terms and even better in rupee terms.

If one looks at the world, the world interest rates are almost zero. Indian bond yields are still at 6%. So some would say that if somebody does not want to take risk, forget getting the bottom right or catching the rally in a world of zero interest rates, if you are getting 6% in bond yields and when inflation is going to remain low at least in the foreseeable future, it is a no brainer that you should have large allocation towards government securities?

Yes, which is exactly what we have had and we have done very well. I know G-secs in our investments have been very strong this year. I still see room for rate cuts. India cannot still afford 6% rates when the world is at zero or negative. So there is still a gap that India needs to close. So when you see that coming down, obviously your G-secs look good. I mean which company’s debt would you want to buy today right? It is a terrible corporate debt market right now and I do not see that changing. It just keeps getting worse.

So the only safe haven there is at least bet on Government of India as it is but at least bet on their debt rather than bet on the debt of sundry corporates and I am not excluding anybody from this in terms of corporate. I think everybody is at risk in this kind of a meltdown situation. There are no corporates that are immune to this. No corporate with debt is immune to the problems that are being experienced and will go out in the future as well.

The positioning of the market is such that mutual funds or fund managers currently are extremely overweight financials and they have got it right for the last 10 years. Now the underperformance starts, which means reallocation will happen. Whatever overweight markets have in financials, which is a combination of private banks, NBFCs, insurance companies, is hurting them. So if a large over-owned sector starts underperforming, what will happen to the allocation? How will things move because 40% in financials in this kind of a market is an absurd position for anyone to have?

Yes. But one thing I will guarantee you: very few people will see it that way. Most people will go down with the ship. That is the law of this market because we always believe that we are right and the market is wrong. So if something that was 2,000 is now 800, you would say that is a great buy because earlier it was whatever 5-8 times book. Now it is four times the book and that is cheap. I have said this repeatedly with you on your shows over probably a couple of decades that book value and finances worth zero means nothing. It is just a piece of paper with a number written on it. That is it. It can evaporate.

To give you an example, YES Bank’s value on the stock was Rs 1,500; maybe Rs 300, maybe Rs 200. Where did that go? So you bought YES Bank at Rs 600 thinking it was five times book or six times the book size. Now it is two times the book; that book is a mythical figure. It is like the unicorn. It just does not exist. Only if times are good, it goes up and if times are bad, it will evaporate even today. What concerns me even more is that the scale of recap has been agreed upon previously, which was before corona happened and before the deal that the government gave, I thought it was a very good deal to get SBI and the private sector lenders but that was before this crisis.

Now are you adequately funded in light of this crisis? Is the financing adequate? So those are questions which have to be answered. It is a company with a significant size of loan book; if I am not mistaken, Rs 2.5 lakh crore. In light of where we are right now as an economy, is the original funding of Rs 20,000 crore adequate? Does it need more? If it needs more, who gives it? SBI’s own market cap is Rs 1,50,000 crore. How long can it keep putting capital into any other kind of bank for bailout situations?

So being overweight financials is one thing but you have to recognise it. There is another company from Jaipur, a Rajasthan-based NBFC and that was trading 12 times book value. People are saying now it is cheap because it is five times book value. You gotta be nuts. What do you know about these companies? I mean they are good in a good time but the moment they turn bad, you do not know. The kinds of things that keep coming out, even good banks they forget about some NBFCs doing god knows what kind of crazy loans. So we have always been clear about it that banks are still okay but some of the NBFC are a strict no-no. So far, we have not had the cost to regret that particular view but people will not see it for what it is. People will still go down with their drums beating saying it is cheap.


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