Bet on small-caps with good earnings growth: Shankar Sharma, First Global

Ace-investor, Shankar Sharma, who is the Vice-Chairman and Joint Managing Director, First Global talks about the reasons behind the current correction in the stock market.

Is the correction phase over?
The current correction—it’s a correction, not a bear market—is expected to be over by April. This is likely to happen at the global level. As the markets rallied significantly in the last quarter, a correction was warranted. All the negatives we are talking about now (LTCG tax on equities, trade war fears, etc.) are just excuses for this necessary correction.


Why do you insist that we are not in the first phase of a bear market?
Before the start of a bear market, there are several signals—hyper speculation, companies without any fundamentals leading the market, etc.—none of these are present now. A big macro-economic crisis can also lead to a bear market, but the global economy is picking up now. Though not at hyper levels, valuation are still not cheap, so you can expect slightly below normal returns—similar to what we got during the past four years.

Will a trade war not have any lasting impact?
Yes. The US can’t afford to impose large duties on Chinese products because it will raise prices and inflation in the US. Large scale sourcing from China, started by Walmart and Amazon, has kept inflation low in the US. Large trade deficits are deliberately allowed to keep prices low. High inflation is the last thing a government, looking to get the country out of economic slowdown, wants. The current US rhetoric is only to satisfy the vote banks there.

How do you see the domestic market?
The Indian benchmark indices have generated just about 10% return during the past four years—well below the long-term trend of around 15%. This is because the Indian economy has been growing well below its potential and there has been no earnings growth. Since the economic situation and earnings growth continue to remain bleak, the domestic market will remain an average performer next year too.

Should one worry about the election induced volatility in the later part of the year?
There will be some volatility close to the next parliamentary election. But this is normal—happens every time—and there’s nothing to worry about it. The fear about a coalition government after 2019 is also unwarranted. In the past 25 years, coalition governments have delivered better GDP growth. Coalition will also bring greater control on government policies.

Should investors focus on large-cap, mid-cap or small caps now?
Since the earnings potential is bleak, there is no purpose in concentrating on large-cap stocks. However, investors can bet on small-cap stocks that continue to report good earnings growth.