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Very optimistic on outlook for markets: First Global’s Shankar Sharma

LiveMint logoLiveMint 12-06-2014 Ami Shah

Mumbai: Shankar Sharma, vice-chairman and joint managing director of First Global Securities Pvt. Ltd, is a man known for his contrarian views. This time, however, he is optimistic on the outlook for the markets and expects the new government to roll out a stock market-friendly budget, but cautions that people will have to be patient since they have high expectations from the new Narendra Modi government. Edited excerpts:

What are your expectations from the Modi government?

Given the scale of the mandate, it is clear that the mandate has come because of the high expectations generated by Modi. He has promised a lot to every strata of society, and that is why he got the mandate. It is a very high set of expectations by everybody, and people are hoping he delivers.

Do you think Modi will be able to deliver?

We hope so. Whether that happens or not, really one can’t tell. My view is that even if he can deliver, it will take a while for everything to come together. It remains to be seen how patient people are prepared to be for that.

What are your expectations from the budget next month?

The budget will definitely try and strike the right notes as far as stock markets are concerned. The stock market wants to hear very, very clear things about infrastructure, and that is what it gets most interested in, and most excited about. The BJP (Bharatiya Janata Party) government has always been a very stock market-savvy government. It is the party of choice for stock market traders, and so it understands their language. The market will like to hear everything to do with infrastructure and cutting of welfare spending.

Any wish list for the budget that you would want to share?

My wish is that the government should start spending significantly on research and development (R&D) and on boosting our technological infrastructure. I want the government to boost spending on R&D, because that is an area everybody tends to overlook. India is now lagging other nations like China in home-grown technologies, and that is the growth forward for India. I would like a great deal of emphasis on that. Infrastructure, roads, etc., everybody expects and wants.

Indian equities are at record levels. How do you see the market in the near term?

I am very, very optimistic on the outlook for the markets. The previous government has left the economy in pretty good shape. There are no significant risks unlike China, Brazil or Russia. The current account deficit, public debt, external debt are very low. Growth has been reasonable in the context of an overall growth slowdown in the rest of the world. India has always had high inflation, but it is not like it is running at 20% or something. It might be higher than comfortable levels, but it is not like a doomsday situation.

This government has inherited a very good set of economic parameters from the previous government. The other thing is that the economy has anyway bottomed out last year. So it can only recover from here on irrespective of who is running the country. I think we are in good shape from the stock market perspective. The only one big risk is the sharp rise in oil prices. That is one risk we need to be mindful of.

How do you view the risks to the monsoon and fears of the El Niño effect? Do you think tackling inflation could weigh on the economy?

It can. But right now there is a lot of optimism. When we have a honeymoon period for the government, then in that period we don’t look closely for faults. Markets are in the honeymoon phase, which might last from six months to a year. The real questions will be asked after that.

Which sectors are the favourites of foreign institutional investors at this point of time?

That is very straightforward. Public sector banks and broadly companies which have a lot of debt on their balance sheet.

In economic and stock market downturns, it is normal to invest in companies that have very low debt and are cash surplus. This is because in tough environments, such companies that do not rely on outside finance do well, at the expense of indebted companies.

The situation, however, changes completely when the outlook for markets and the economy brightens. In such situations, savvy investors turn to heavily indebted companies, because equity capital becomes plentifully available. When this happens, these companies can deleverage themselves quickly through equity issuances. Overnight these companies change from being highly leveraged companies to modestly leveraged companies. This leads to a huge increase in their stock prices, because the risk of the company going bust or labouring under a huge debt burden permanently is gone.

Hence, when the outlook for markets becomes bright, smart investors always buy stocks of highly leveraged companies, with screening, of course.

Can you provide some examples of such highly geared companies?

The entire Anil Ambani group (Reliance Group). It has caught the fancy of investors. Even infrastructure companies are higher geared, and those are also the favourites.

Which sectors are being shunned at this point of time?

The ones that have done very well in last two-three years, IT (information technology), pharma and consumer goods.

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