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'Trust a fund manager, buy some small-cap funds and stay invested.'
Illustration: Dominic Xavier/Rediff.com
Entering a new year, Shankar Sharma, vice-chairman and joint managing director at First Global, the multinational securities house, tells Puneet Wadhwa investors should ignore all the noise around elections, policies of global central banks, global macros, etc, and spend some time in researching stocks, before doing bottom-up selection.
What is your market outlook for 2018?
Can India outperform its emerging market peers?
Indian large-caps (represented by the Nifty 50 index) have been mostly flat relatively or underperformed the rest of the world.
In absolute terms, Indian markets have done well; however, the performance relative to other world markets has been worse.
Primarily, on account of India's growth profile being a little worse than other markets.
The rest of the world -- even those hit badly between 2010 and 2015 -- is seeing upward revision in GDP growth rates; India has seen negative revisions.
I haven't seen India buck the global growth trend in 30 years.
The markets (large-caps) are reflecting this. Global GDP is growing at 3.8 per cent (annually), the strongest in a decade, while India is growing around five per cent or so (old series), the lowest premium over global growth in two-and-a-half decades. Disappointing, to say the least.
On the other hand, China is trying to slow down its growth!
Corporate earnings growth back home has also been tepid.
Going ahead, if we do not compare with global peers, Indian markets will do well.
On a relative basis, however, the large-caps will remain laggards, compared to global benchmarks.
What about mid- and small-caps?
I look at India as two separate markets. One that comprises large-caps and the other that has the mid-and small-caps.
I continue to believe it is the second set that will remain absolutely rocking.
The small-cap story remains strong and they remain the best equity class across all global markets.
Indian small-caps look terrific; large-caps look average. I have held this view for the past three years and nothing compels me to change this.
Where is this optimism for the small-caps coming from?
Two reasons. First, on a relative basis, Indian small-caps are less exposed to things like interest rate tightening and other macro factors, which in India appear to be worsening.
The inflation outlook now isn't benign. Oil prices, too, are headed north and can move up $10 to $15 a barrel at least.
All these things will crimp the Reserve Bank of India's ability to tinker with rates.
We do not expect rate cuts at all for the next 12 months. On the contrary, there could be a rate hike.
Large-caps are susceptible to macro changes, good or bad.
For small-caps, macro factors don't really matter much, as they are not exposed much to the vagaries of global macros. They are more driven by micros of their own businesses or own sectors.
Over the past few years, most small-cap business owners have realised it is better to run a good and clean business, than do things to please the markets, as was happening in 2006-2007, when people were doing business for vanity metrics, such as order books, doing business without much cash flow, etc.
This has changed and good companies/promoters are generating a healthy return on equity of over 20 per cent.
Do you see the key macros worsening over the next one year?
Yes, the macros for India in 2018 will be a little worse than in 2017. This comes from the belief that inflation will not cool off anytime soon.
Commodity prices, especially crude oil, across the globe have hardened.
Higher spending and rising oil prices will impact the twin deficits -- fiscal and current account.
In case the government does not wish to see the fiscal deficit slipping out of hand, it will have to cut spending.
Either way, it is not a good situation.
We could be looking at a twin deficit situation of six per cent or so, the highest since the 'taper caper' of 2013.
How comfortable are you with the (stock) valuations at this stage?
It is my belief that valuations globally have trended up and, in line with that, India has also moved higher.
I don't believe the world is heading for a bear market anytime soon.
Though valuations back home might appear stretched, the fact is the valuations here will not contract on their own, unless there is a global contraction.
Which sectors will do well?
We have been bullish on the chemicals sector.
Wherever China is cutting back on production due to environmental concerns, those sectors are likely to do well.
I continue to be bullish on the steel sector as well. Overall, the commodity space looks good.
I would rate consumer discretionary as average.
The automobile sector, however, remains strong and we have been bullish on it for quite a while.
Pure consumer/FMCG sector is debatable. Some stocks do appear overvalued here.
Infra, selectively, has been good and I continue to like this space, especially the companies that are now fixing their balance sheets.
Your advice to investors going into 2018.
The single advice is that India remains a bottoms-up stock picker's market.
Investors should ignore all the noise around elections, policies of global central banks, global macros, etc, and spend some time researching stocks before doing bottom-up stock picking.
A number of good stories are available.
In case they can't, trust a fund manager, buy some small-cap funds and stay invested.
Both strategies will do well over a period of time.
Buy 10 good stocks and you are set for a lifetime!
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