'Bull Market Has Ended'

'The bull market cycle ran for five years. It's the end of that cycle.'
'The next cycle is a down cycle, and in that down cycle, you will see the Sensex falling from their highs of around 68,000 to maybe 40,000-50,000 at the bottom of the cycle.'

Shankar Sharma, founder of GQuant Investech, asserts that the Indian bull market, which lasted approximately five years, ended in late 2024, with small-cap stocks peaking in January 2025.

Sharma attributes the relentless selling by foreign institutional investors (FIIs), who have offloaded over Rs 3 lakh crore since October 2024, primarily to India's taxation policies. These policies, coupled with rupee depreciation and capital gains taxes, have made Indian equities less attractive for the FIIs, with net returns barely competing with US Treasury yields.

In this two-part interview with Prasanna D Zore/Rediff.com, Shankar Sharma discusses why he thinks the bull market that began in 2020 has almost but come to an end, how he plans to play the oncoming bear market, why the Indian government will not overshoot its fiscal deficit target pegged at 4.3% of GDP, why the FIIs are selling big in India, why Trump's tariff tantrums may not much impact the Indian economy except the auto sector, that too due to Chinese imports and how retail investors should take advantage of sharp-and-swift bear market rallies.

February would be the fifth straight month for the Indian benchmarks to close in the negative. The last time this happened was in 1996. And FIIs have been relentless sellers, having sold stocks worth more than Rs 3 lakh crore since October 2024.
How do you read the Indian markets in this context, and what lies ahead?

The markets have had a very good five-year period, and it's the end of the bull market. It's as simple as that. There's nothing more to overanalyse in this.

The typical Indian bull market lasts between four and six years. I have written about it and talked about it in my various interviews since the middle of last year, saying that it's a tiring, tired, and aging bull market.

This bull market ended in the middle of the fifth year. Basically, it started around April 2020 and pretty much got over by September-October 2024. The small-cap bull market ended in January 2025. So, it's pretty much about four -and-a-half to five years.

Is that the reason why FIIs are selling so relentlessly? Because they also know that the Indian bull market is over, and they can now take advantage of risk-free returns in the US Treasury? Or is there more to this FII selling?

India, by way of its taxation policies, has made it very unattractive for foreign investors. That is the basic reason why foreigners don't like India anymore.

Think about it: If your nominal GDP growth is around 10%, which is what the government is projecting (and that is in rupee terms), stock market returns typically mirror nominal GDP growth. So, the stock market returns expected from India will be around 10%, maybe 11%.

It will not be 14%-15%, as we have calculated from the beginning of the data series for the Sensex. The reason is that for the bulk of those periods, nominal GDP growth used to be 14%-15%. But the more recent GDP growth in nominal terms has been around 10%, and even the government in this Budget is projecting only 10%.

If you think about it, 10% expected return from Indian equities minus rupee depreciation -- let's first deduct around 15% between long-term and short-term capital gains (the midpoint). So, you knock off 1.5% from your 10%, leaving you with 8.5% in rupee terms. Then, minus currency depreciation of at least 3%-4%, you're left with 4.5%.

The US Treasury two-year bond today yields around 4.3%. Why would anybody in their right senses waste their time, if they had dollar investments offering them same returns without having to bother about currency fluctuations, and other India-specific tax policies?

On a macro top-down basis, there is absolutely no case for a foreign investor to look at India, given the slowing growth and, more importantly, the really unfair burden of taxation on the stock market, which does not exist for foreign investors pretty much anywhere in the world.

If these impediments were to be removed, do you think FIIs will come back to India? Not that they have sold lock, stock, and barrel but still Rs 3 lakh crore is a huge amount?

There is no point in answering that question because they cannot be removed. It is like if you were to say, if Indian roads become better, we can sell more Lamborghini cars, or if our air quality became good, then we would have more parks, and people will become very fit.

All that is not going to happen. So, why speculate about what's not going to happen? I can list one million things in India that should have happened but have not happened. So, to ask for a reversal of this taxation policy is literally like life on Mars. It's not going to happen.

Recently, at an investors' meet in Dubai, you talked about the 'Indian Lake of Returns' theory, and in that, you predicted the end of the bull market.
Why do you think that the Sensex will return only 2.5% CAGR, and small caps will see negative 3.1% for the next five years?

Those are best-case estimates in my view. They can be even lower. By the way, these are only rupee numbers. If you factor in dollar appreciation or rupee depreciation, you're looking at a CAGR of minus 4.5% on both these indexes for the next five years.

So, it's very simple. As I said, the bull market cycle ran for five years. It's the end of that cycle. The next cycle is a down cycle, and in that down cycle, you will see the Sensex falling from their highs of around 68,000 to maybe 40,000-50,000 at the bottom of the cycle.

Then, you will see intra-period rallies for the next five years. So, from 50,000, you will rally back 20% to 60,000. Then again, everybody will get very chirpy about the market. But on a point-to-point basis, you will see no gains from the high of 2024 to 2030.

You will see negative returns from the Sensex or the small-cap market. There will be bottom-up stock-picking opportunities, trading opportunities -- all that is part and parcel of investing.

We are talking about a structural bull market that has ended. It was a trending market, and now a trading market has come. That's where we are in the cycle.

With slowing growth and fiscal constraints, do you think India's economic momentum can be sustained without aggressive government spending?
No doubt, the government is spending Rs 11 lakh crore. They've budgeted for it. Nobody knows how much they will actually spend.
Do you think it is enough to revive the Indian economy?

The government has projected nominal growth rate at 10% (for FY 2025-2026). So, even after all these measures, we are still expecting to grow at 10% nominally.

Now, let's break down the budgetary math. As I've mentioned before, and it's important to highlight, India's taxation system primarily relies on indirect taxes (mainly GST) and direct taxes (corporate and personal income tax).

Over the past few Budgets -- perhaps in the last six or seven years -- the government has reduced corporate income tax, most notably in 2019 when it was cut significantly. In the most recent Budget, personal income tax was also reduced.

So, two historically stable sources of tax revenue have been lowered, while the government has increased taxation on stock market profits.

From a top-down perspective, this shift means we have moved away from predictable tax sources to an inherently volatile one -- the stock market.

If market conditions remain weak, it is logical to expect a shortfall in personal income tax collections, which are projected to grow at 14%.

If capital gains tax collections fall short -- which seems likely given the market losses since September 2024 -- personal income tax revenue will also take a hit.

If that happens, what options does the government have?

Will they overshoot the fiscal deficit target of 4.4%? Unlikely.

The government is firmly committed to maintaining fiscal discipline. However, if personal income tax revenue falls short -- and corporate income tax collections also decline due to the ongoing downgrades in earnings -- it is highly likely that overall tax revenue will miss projections.

If both of these components underperform and the fiscal deficit must be maintained, the only viable option is to cut capital expenditure (capex).

This means the Rs 11 lakh crore budgeted for capex may be reduced to Rs 10 lakh crore -- or even less -- which would further slow the economy down.

By making the stock market a key driver of tax revenue, we've created a structural problem.

This has never happened in India's history. In my 35-38 years in the markets, the economy and taxation system were never so dependent on stock market gains.

Traditionally, the stock market was the tail that wagged the economic dog; now, it has become the dog itself. I don't like that.

Do you think this will boomerang on the Indian fiscal situation? And if that were to happen do you also think that the government will take the risk of overshooting its fiscal deficit target?

That's what I just said. They will not overshoot the fiscal deficit. They'll maintain it. But if push comes to shove, they will cut back on capex.

If push comes to shove, do you think this government has the political capital to take the risk of overshooting its fiscal deficit targets? Because where else will the growth come from?

I'm telling you, they will not overshoot. They will not overshoot. They will cut back on capex.