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Good economics does not win elections, so Modi is doing what he thinks right: Shankar Sharma

As politics, that too messy and disillusioned, suddenly takes primacy over the economic agenda of the Modi government, Dalal Street is not too perturbed and looks ready to give the government time to fix it.

That vibe comes from none other than the man known for his no-holds-barred observations when it comes to politics and policies.

“The Modi-led BJP government is doing what it thinks is right for the country. Time will tell, as it always does, how effective those moves have been,” says Shankar Sharma, Vice-Chairman and Joint Managing Director of First Global.

He says the government is right in zeroing in on politics, because focusing solely on the economy has made previous governments lose power in India.

“In India, there is no evidence that good economics can win you elections. There is no guarantee that a government that focuses on the economy will get re-elected,” Sharma said.

The Modi government and his party find themselves firefighting over an amendment to the Citizenship Act that snowballed into a major controversy, triggering widespread protests across the country. This comes at a time when India’s GDP has plumbed new lows for successive quarters, forcing major global agencies to cut growth estimates to multi-year lows.

However, the political climate that has suddenly turned tense has not yet made it into the narratives of rating agencies and FIIs, who have been assessing the economy constantly.

Big guns to get bigger

Sharma, a 36-year veteran on Dalal Street, is worried about the state of the economy and businesses. He fears the much-awaited economic revival may remain elusive for yet another year in Calendar 2020

“India is becoming a very concentrated market in terms of economic power across industries. Only a handful of companies survive when there is very little or no economic growth,” he points out.

Sharma says going forward, the market will continue to reward companies that do not require external capital to drive growth.

He said a lot of companies are under severe stress because of slowing growth. “Stronger businesses will keep getting stronger, while weaker ones will keep getting marginalised. Companies that have the capacity to survive in these difficult times will grow, while the rest will die out,” he said.

The stock market is already reflecting this situation. Total market capitalisation of the Sensex pack, comprising India’s 30 blue chip names, rose 24 per cent to Rs 74 lakh crore since January 1, 2018, while the same value for BSE Smallcap index companies plunged 30 per cent to Rs 20 lakh crore in the same period.

Watch | 2020 will also be about largecaps, only select midcaps will revive: Shankar Sharma

Valuations & ideas for investment

India’s equity benchmarks Sensex and Nifty hovered near their record high levels on Thursday. The 30-share Sensex traded at a price-to-earnings ratio (P/E) of nearly 29 times against its five-year average of 23 times. Nifty P/E ruled around 28 against its long-term average of 25.

“Largecaps are looking extremely stretched in terms of valuation, and it defies all logic, be it for banks, consumer names or any other sector that is doing well,” Sharma quips.

“It’s an amazingly expensive market. Anything which is half-decent is trading at 50 times, 70 times, 80 times earnings, which are not acceptable.”

For nearly 50 per cent of BSE500 companies, the price-to-earnings (P/E) ratios hovered above industry averages on Thursday, even after the market corrected some bit over the past couple of days.

Sharma, whose has been a rags-to-riches story on Dalal Street, says this may not be the right time to play contrarian on Dalal Street. Instead, he advised investors to stay put in largecaps with tight stop losses.

“In the midcap and smallcap space, there might only be some isolated pockets of revival. A broader revival in this segment may not materialise anytime soon. Only when there is broader economic growth, does everybody prosper. On the contrary, when there is limited economic growth, the fruits are taken away by a small set of large companies,” he explains.

Sharma says the economy won’t see double-digit earnings growth in the near future. “If your nominal GDP growth is around 6 per cent, then one can expect up to 4 per cent earnings growth. Most people start off, thinking 20 per cent, and towards the end of the year, it comes back to 0-2 per cent. We have seen this trend over the past four-five years,” he says.

Anther market veteran Navneet Munot of SBI Mutual Fund last week made a case to go cherry-picking on Dalal Street, saying a low growth phase of the economy is always a great opportunity to buy stocks cheap.

Sharma has a rider on that. He says the key question to answer first is whether the current economic slowdown is structural or cyclical.

“If it is cyclical, then the (cherry-picking) theory holds. But the ongoing slowdown looks structural in many ways. The economy is severely damaged and it will probably not recover uniformly for a long-long time,” he said.

While majority of the stocks trade cheap on Dalal Street, investors are at a loss, trying to figure out the safer ones, as many companies irrespective of market cap, business model and corporate legacy have gone belly up in the recent past owning to problems with corporate governance or high leverage.

Sharma has sounded extreme caution. “Many industries are damaged badly, and they will not recover for a long-long time. These are structural problems. Cherry-picking in these minefields is not wise. Stay in the comfort of companies that have survived this slowdown. That is a safer strategy,” he says.

On Budget & Divestment

After a major government bonanza in the form of a corporate tax cut, which helped lift business sentiment to a great extent, financial markets have turned their focus on the Union Budget for some more dole-outs to address supply-side concerns.

Sharma says the Finance Minister may announce some sops for taxpayers. “The government may increase the fiscal deficit limit sharply, as otherwise, there isn’t any money left to stimulate a broader revival,” he points out.

The market veteran, however, argued against the government move to sell off public sector companies. “These are jewels in the crown. The government should make them stronger, larger and better rather than sell them off to foreigners for pennies,” says he.

The Modi government has lined up public sector refiner and oil marketing companies BPCL for outright sale, creating a feel-good factor in India Inc. The Modi government raised Rs 2,79,622 crore from disinvestment in public sector undertakings (PSUs) during 2014-19 compared with Rs 1,07,833 crore raised during the 10-year UPA rule during 2004-14.

Bright future for good IPOs

The primary market has come to hog limelight in the later months of the Calendar gone by after a near-drought situation for much of the year. Recent issues like IRCTC, CSB Bank, Ujjivan Small Finance Bank saw massive subscriptions going up to 167 times, bringing back memories of the times when this space used to be known for creating quick bucks for investors.

However, Sharma believes IPOs have not really been very rewarding. “By and large, good ones are always overpriced. They will continue to see huge subscriptions while there will be very little appetite for marginal issues,” he said.

Source: Economic Times