By Shankar Sharma Russia’s going to war against Ukraine will have a cascading effect on India. Higher oil prices will impact corporate profits, interest rates and market returns. In a freewheeling chat with Malini Bhupta from Dubai, Shankar Sharma, founder of GQuant Investech, a global asset management fintech company, says rising inflation is a big […]
By Shankar Sharma
Russia’s going to war against Ukraine will have a cascading effect on India. Higher oil prices will impact corporate profits, interest rates and market returns. In a freewheeling chat with Malini Bhupta from Dubai, Shankar Sharma, founder of GQuant Investech, a global asset management fintech company, says rising inflation is a big question mark for Indian equities. Edited excerpts:
In the aftermath of the war on Ukraine, what is in store?
For Indian markets let’s be clear : we will not remain immune to the problems. India is a significant market and any global trend will affect our market. Higher commodity prices, geopolitical issues and central bank action will affect India. Typically, after two good years, markets tend to move sideways to slightly down in the third year at the index level. And 2020 and 2021 were good years for the market. Of course, that does not mean you cannot make money by working harder.
What are the key risks to Indian equities?
The key risk is inflation, which is in the form of rising commodity prices. We have enjoyed low commodity prices, but that is reversing now. The easy money policy that everyone followed is now reversing. If cheap money trend turns, it will have an impact on equities. Oil prices have a cascading effect on inflation and India will also have to do something on interest rates. My view is that monetary policy action cannot bring down prices. Bond yields are the “soutan” of the markets. If yields go up, then fixed income becomes more attractive than equities. Therefore, rising inflation is a big question mark for Indian markets.
With China and Russia alienating themselves from the Western powers, do you think this could benefit India’s capital flows?
I don’t think so. If that were the case then why have FPIs been selling. They have been consistently selling since October last year to nearly `1.3 lakh crore. Global flows are more complicated than what appear. In some industries India will benefit from the China plus one strategy. Every few years, there are some sectors that drive markets. In this phase, what sectors do you see driving markets.
Barring IT services, I think the other sectors like BFSI and consumer are done and dusted. There are new companies emerging and will do well. There will be pure tech entities that will come to market like waste management companies. Clean technology companies will do very well. Electric vehicles and ancillaries to these companies will become big. The next five-10 years will be driven by these new companies and not those which drove markets in the past 20 years.
New age tech companies have been battered in the last few months after they listed. What went wrong?
This is a market and welcome to the market. The regulator should ensure that nothing dubious comes to the market. If that is eliminated the rest should be left to markets to decide. There was nothing wrong in allowing them, the rule was clear that in such entities 60% of the company had to be subscribed by institutional investors, the rest could go to retail. Investors need to learn that they need to be discerning and not get carried away by the hype.
What is in store for conglomerates like Reliance and large groups like Adani, Tatas and Birla? Can they navigate the current environment?
All of them have different strategies. Tatas are a venerable group and present in every sector but they have not been successful. They have tried their hand at many things but none of those have done much for Tatas. It is really TCS. Tata Steel and Tata Motors are highly cyclical. Now Tatas want to enter consumer segments . Let’s see. We need to see how things pan out for these existing groups and their new businesses. The managerial bandwidth will be tested. The Tatas have an advantage there, but the Ambanis and Adanis are more entrepreneurial. It is too early to take a call on how they will handle the new businesses they are entering, which are fairly complicated. Supertankers are large and they cannot navigate very quickly. Indian companies are nowhere near the Chinese in terms of technology. The good thing is that Indian companies are good at managing the regulatory landscape.
Why don’t we have an Alibaba or Tencent In India?
China did not allow foreign companies to enter, while India is open to foreign e-commerce and social media companies. China did a smart thing by not opening its doors. It always had a surplus of dollars and did not need foreign capital, but it needed expertise and technology. India did not have that luxury as it needed foreign capital. There’s no rocket science in building a social media software but if you ban foreign companies, only then these can become big.
You are a big votary of small- and mid-cap companies. But they also are more volatile than the large-caps, how can retail navigate this space?
Nobody says the small and mid are the easiest part of the market. Now it will be tougher to make money as large-caps have become big and beyond which it will be hard for them to deliver 15-20% consistent returns. For the retail investors there is a simplified approach, which is that 50-60% of your investible surplus should be in large-caps. The remaining should be spread over sectors and not companies. If you like a sector then buy four and five in each sector. Don’t buy one in small sectors but instead but four or five. Chances are you will find two-three companies which will be out of the park winners.
Is the world headed for a recession?
The world, thanks to the GFC and the 2020 Covid crisis, made a new template for central banks. Before that it was not even thought that rates could be this low. It brought the world back from the brink of disasters in 2008 and 2020. They kept the stimulus drug on but the reality is that the world never recovered from the GFC evenly. Many people were relegated to the fringes. Did the real economy recover and did livelihoods recover? I don’t think so. The stock markets’ performance became an easy headline to shoot for by central banks. If the market goes up, the assumption is everyone is making money. Now we are heading to a situation where the side effects of the steroid are kicking in. It is this fear that I have and whether the whole easy liquidity cycle is unwinding. It could be The Great Unwinding.
Do you think the geopolitical situation will give the central banks a chance to push back normalisation?
Yes, the geopolitical crisis may give central banks a fig leaf to slow the pace of hikes.
What about India? Should India raise rates in tandem with other central banks?
This is an important discussion by policymakers. My view is that raising rates in a country like India, where the inflation basket is totally insensitive to rates, is pointless. Our inflation basket has little to do with interest rates. In developed countries, rates impact consumption more because of leveraged consumption. Raising rates in India only hurt growth and not consumption. In the UPA regime, the rates were raised and growth suffered. The point is simple, by raising rates you don’t cut inflation but you do hurt growth.
