See 20-30% sell-off in mkts in few months: Shankar Sharma

Shankar Sharma, Vice-Chairman and Joint Managing Director, First Global, does not expect the current rally to continue for more than a week. “The market would see a huge sell-off by mid-December, which may continue till January end.” He estimates a 20-30% sell-off in markets during the next few months and sees a durable rally only after the next fall. Sharma foresees an earnings downtrend in FY10. “We see that fiscal year being worse than FY09 for the markets. Sharma feels the monetary easing would not boost the market significantly and said the markets may at best rally for 1-2 days. He added that the fiscal package under discussion was too little to make a difference. He believes the elections could compound the current situation and would be a dampener. Here is a verbatim transcript of the exclusive interview with Shankar Sharma on CNBC-TV18. Also watch the accompanying video. Q: One of you recent reports was talking a pullback or a temporary pullback in equities. Has that come and gone with that five-six day rally that we saw just a few days back or do you think its still pending? A: We issued this report a week before the last and globally markets did rally about 10-12% from the lows India however, didn’t participate and that’s in partly due to the terror attacks. There’s probably a week more for the rally to continue. From the middle of December the markets will begin to go back into the realization that this quarter will be an absolute washout quarter for any company anywhere in the world. So, whether you take a company in technology or in retail or a company in metals or infrastructure or automobiles or anything almost across the board you will see completely washed out earnings. Markets will not discount this substantial slowdown in advance so I reckon somewhere in the middle of the month i.e. this month the market will begin to get a sense of how bad their numbers are going to be. I wouldn’t be surprised if a few major companies across the world came out and issue earnings warnings that they are not going to be able to meet the numbers that they had forecasted for this quarter. Therefore we see the market beginning to sell-off probably in the middle of December and this could continue I reckon to the middle of January or end of January. This month could be as ugly as October because I do not think the markets have factored in how bad the numbers in this quarter are going to be, globally. The October sell-off was largely due to the Lehman bankruptcy and how it affected the credit market. But the credit market effect on the real economy will now be visible once these numbers begin to come out and we all know anecdotally how bad numbers in India will be for large industries and how bad they will be for many international companies. So I think the rally probably has a few more days to go. Beyond that it will be very brave to conjecture as the rally continues. Q: What is your sense of how ugly it could get in December-January? Do you think it is a revisit of the October lows or could it get worse than that? A: India is pretty close to that, not on the intra-day basis but on a closing basis. We are about 7-8% away from the lows that we saw recently. So the October lows have gone on a closing basis. Looking at the way the world is shaping up, I wouldn’t be surprised if markets witness a 20-30% sell off in the next couple of months. That leads me to believe the markets will probably see a more durable rally because one of the strange things about this bear market has been that the rallies have not been durable, they haven’t even lasted for 30-45 days, they are over in 5-10 or 15 days. A durable rally will probably succeed a pretty severe fall which begins in the next few days time. The markets have not fully discounted the bad numbers anywhere in the world. Analysts’ estimates are still way too high and I think this quarter will knock some sense into all those numbers. Q: In the short-term, how high would you rate the chances that the market actually settles into a range is very boring for the next few weeks does nothing? A: I don’t think any range has lasted more than a few days. The markets have been very strongly trending markets this year as they were in the last four-five years. The trading ranges have been in consolidation phases before markets breakout in whatever direction they have been trading in. So when there was a bull market, the consolidations were very short. There were very sharp, short pullbacks and then markets would continue going up. This time, while pullbacks may not have been that sharp, there have been few pullbacks of a few days duration and then they continue going down. So, I don’t think there is any trading range or any such situation developing at all. Merely because the markets don’t do much for three days, it starts to build theories that it is in a trading range. However, I don’t think that is a real possibility. Q: There is the promise of course now of fiscal action and monetary action coming together. How much does that translate into for the market in real terms you think? A: Maybe a day’s rally, maybe two days. One should remember this is like a morphine shot. You need greater and greater morphine shots in order to kill the pain and that is the way this thing works. The first one will lead to greater euphoria and each successive injection whether it is monetary or fiscal – in economics they call it the Law of Diminishing Marginal Utility and that is the way markets look at such stimuli packages. So globally, the first ones (packages) did a lot of good in terms of market action and then successively markets say that nothing is working and it is just another stimulus package. In India, we haven’t seen anything on the fiscal side yet. So that may help for a couple of days maybe three days but it is just very little – A USD 10 billion packages is nothing. I don’t think it conveys a very good picture to the world. China is putting up a USD 550 billion package and here we are announcing a USD 10 billion package. It doesn’t seem right. They may as well not announce it and on a subterranean basis — keep doing what you are doing on a slightly accelerated basis — why make a big song and dance about something which is like 2% of what China is doing? So it’s better not talk about it. Q: How are you reading 2009 now if there is a big fall or big leg down coming around the January numbers after that how do you see the rest of 2009? A: The numbers in FY10 will be substantially worse. The slowdown has accelerated post the middle of the calendar year 2009. So we have had more or less five-six months of reasonable earnings growth and reasonable GDP (Gross Domestic Product) growth coming and that’s not going to be replicable for the rest of the financial year and the calendar year of 2009. FY10 will definitely be a down year in terms of earnings for India. I cannot see which sector would lead the earnings growth. On an aggregate basis there might be a few sectors which will deliver positive earnings growth. But you will not see the entire market deliver that largely because big companies like Reliance or the auto pack or the metal pack none of those companies are going to have earnings growth. You can only debate on how much lower the earnings will go but growth is going to be very dim for a large part of the market. Some of the companies like telecom may grow but that’s not going to be enough to offset the decline in earnings we see from a lot of the cyclical companies. So I am pretty certain and it's early days to start making definitive forecasts in FY10. But our take is, you will definitely see a down earnings in FY10. Globally, it will be pretty much the same case; corporate earnings that was strong for the last five years will be decimated. Sector wise; semiconductors are hurting, retail is hurting, banks are obviously gone. The world’s earnings composition also changes in every phase of a bull market. The last five years the global market was driven largely by the commodity cyclical and they became large part of the indexes worldwide and they became even larger part of earnings growth worldwide. Now that sector is gone, oil is at USD 45 per barrel and it can easily hit USD 20 per barrel in the next six-eight months time. Exxon Mobil, iron ore or steel were all the big drivers of earnings growth but those are not going to come back for many years in terms of earnings growth. You might well see a situation where they might make losses 12 months from now because it is our view that commodity prices will breach the lows of 2002. I am talking about the absolute commodity prices, which means that the stocks of those commodities so whether it is BHP Billiton, Rio Tinto or Exxon Mobil, Companhia Vale do Rio Doce (CVRD) or Indian metal companies should all trade lower than their prices of 2002-03, in terms of the absolute stock price. When the commodity price breaches the lows of 2002 the stocks of those companies will trade even lower because these companies have upped their risk in the last five years. They have gone and made acquisitions, they have leveraged their balance sheets up. Rio Tinto has got USD 46 billion of debt and that is a lot of debt built up in the last few years and about USD 8-10 billion is coming due in the next 12 months time. These companies are far riskier than they were at the trough of the commodity cycle. So when you hit another trough, these stocks will go down even lower and therefore the earnings will obviously be linked to the trough. I don’t see how that earnings growth is going to be replicable out of the same pack. So may be some other pack has to emerge. It is too early in this bear market to start talking of the sector, which balances out the negatives of the commodity cyclical. Q: At the very start of the conversation, you mentioned autos, what would you do with that whole pocket? A: Autos are symptomatic of what the real problems are. So, as far as the real economy is concerned, these numbers are mind-bogglingly terrible numbers and I don’t see how this thing will revive or turnaround that quickly. Companies like a Hero Honda or a Maruti don’t have much leverage. They are not going to be in a financial stress if the market continues to be as bad as it is. But you have other leveraged auto companies and I just fear that leverages with these kind of poor numbers, interest cost, interest burden none of those things are a good cocktail. They are a very lethal cocktail and the sector is in deep strife. Q: There is one view which is the optimistic view that maybe June-July 2009 onwards as we get into Q2 or Q3 FY10, you see the economy rebounding in a bit or earnings probably hitting some kind of a trough and the markets probably starts some kind of a recovery. Is that too optimistic a view in your eyes? A: I do not think that’s too optimistic. It only depends on what the trough is and what the trough for the market is. If the market goes to 5,000 and rebounds to 8,000 or 9,000 which is where we are now would you call that a rebound or would you call that as nothing move on point to point basis. So all of this will depend on where we are at that point in time when the so-called recovery starts. I am not even sure it will be that easy to achieve because we are still in the deceleration mode and economies do not necessarily have that big swings in their growth rates as corporate earnings do. It’s like a super tanker; they will start climbing and they will start coming down. They can go down for 18 months or 24 months before maybe another leg of the upstream in GDP growth starts. But what I don’t think people are getting especially in India is how serious this whole global problem is. Across the world in every single country people have understood the depth of the problem and they understand the contours and magnitude of the problem the world facing is. We still do not understand that this has nothing to do with India. There is huge global unwinding going on, it’s an unwinding of the excesses build over many decades and to say that those excesses can be purged and now the excess are being purged in fact you are putting excesses upon excesses. Governments are printing money. So basically you are borrowing from the people to give to private hands. There is no equity left in the world; you cannot build Debt Empire without having equity and the only people in the world who have any equity or the sovereign wealthy fund from West Asia and with oil at USD 45 per barrel their fiscal balances are just going to go because the last man standing was Saudi. Saudi Arabia needed USD 50 per barrel to balance their book. At USD 45 per barrel they have also gone. Russia went at USD 65-70 per barrel. In most other countries the cost of production was far higher and their quality of crude was lower. Therefore, they need higher crude prices for them to break even. There is a huge global problem. This is not a garden variety walk in the park recession. So there no point talking about Tata Steel or Bharti or Reliance Industries or any of our stalwart companies when there is such a huge problem across the world. I have been trying to figure out what’s the end game to this and I have been speaking to a lot of very intelligent folks across the world in the last three-four months, meeting them as well and nobody can figure out where the light at the end of this tunnel is. So India is a small part of whole equation its not the whole jigsaw puzzle. Just looking at the way the world is going, you have pretty much the entire world in recession now. Looking at the China output numbers, looking at India CMIE (Centre for Monitoring Indian Economy), everything is pointing to a contraction of industrial activity. To hold out hope that the markets will have a great second half of 2009, lets get through 2008 first, lets get through the next three months of 2009 first and we will start worrying about 2009 end. There are plenty of more things to worry about now than to worry about second half of 2009. Q: There is that fear though on how long this pain is going to last. Just on the subject of global recession the fear now is it goes all the way into 2011 and who knows the kind of body blows things like our currencies might have to take a side from the equity market? A: You are absolutely right, the dollar continues to decimate most currencies. You can see how badly the GBP (Great Britain Pounds) is faring and it is our view that the doomed currency tag now belongs to the GBP rather than to the dollar because we see the GBP going to 120-125 against the US dollar. If that happens on the same lines you will see the euro trade at parity against the dollar and euro zone has its own problems. You needed a good recession in the euro zone for the internal differences to come out and you can hear so many discordant notes, Ireland wants to breach all fiscal norms, Spain and Italy will be shouting from the rooftops now. So specially the southern European nations and Ireland, the new entrants, they will all start to feel huge pain, the populations there will start to feel huge pain and they will all demand to ease the stifling policies of the ECB driving their internal economics. At that point what happens to the Euro? The US is in deep trouble but just because others are in deeper trouble relative to the US - because US’s problems are known others are not that well known - we just see the US dollar strengthening which means that emerging market currencies will also follow in tandem. You don’t just have an equity market problems, you have a currency problem as well. Across the world, very few currencies will be able to hold against the dollar maybe the Swiss Franc and the yen might and maybe one or two others but by and large that is the other big problem, a strong dollar helps nobody. That is the worst news we could have on top of an already bad situation but whether we like it or not we have to live with a strong dollar for the next few months if not a few years and that seems paradoxical but that is the way markets are. Unless you have the dollar weakening and weakening substantially, there is going to be no bull market and emerging markets. That is a simple one line, simplistic way of looking at emerging markets. Through the '90s the dollar was more or less the strong currency and there was only one market to play which was the US market. EMs went nowhere, India went nowhere, Russia was a dog market, Asia went through some degree of upswing between '94 and '96 and then they all got crushed. From 2002 when the dollar weakened, EMs did well. The dollar strengthens, EMs don’t do well. It is as simple as that. Q: In the next few months we will also have elections out here, is that a sideshow or do you see that having any material bearing on our market performance? A: It could compound an already uncertain situation because policy making then just freezes up – it freezes up in a best of times in India but before election obviously by law you cannot take too many big policy decisions, you cannot give out too much business and I think that time probably will come by January and February. After two-three months into the new government’s tenure, there will be the same kind of paralysis of policy making. So overall the elections will be a big dampener. courtsy: moneycontrol ;Thu, Dec 04, 2008 at 10:05 , Updated at Fri, Dec 05, 2008 at 18:22 Source : CNBC-TV18