Bull market ageing, could lose steam from here, says Shankar Sharma

The Indian equity markets have had a good run in the last four years, and now, as it enters into fifth year, the bull run could lose steam, said Shankar Sharma, founder, GQuant Investech at the recent Business Standard Manthan in New Delhi on Wednesday.

Sharma was apparently tracing back the start of the bull run to March 23, 2020, when the markets had hit a low due to outbreak of Covid-19 and started the upward journey from there.

“Data is clear that no bull-market lasts beyond five years. We are entering the fifth year where, typically, the bull-markets become tricky, moody and unpredictable. Had this been a young bull-market (into its first or the second year), regulatory issues regarding the mid and smallcaps would have been shrugged off by the markets. These problems for an ageing bull market tend to draw blood,” he said.

According to Sharma, ideally a “Horse” should be used as an indicator of the rally seen in the markets as it can run long distances at a fast pace. A “Bull”, he said, can at best do a short sprint and needs occasional breaks/pauses to catch its breath before charging again.

Meanwhile, midcap and smallcap stocks have taken it on their chin in the past few weeks as both the indices saw sharp cuts after the market regulator, the Securities Exchange Board of India (Sebi), warned against the excessive valuation in some of the counters in these two segments. The cuts in individual stocks that comprise these mid and smallcap indexes have been much sharper.

Sharma, meanwhile, feels that both Sebi and the Reserve Bank of India (RBI) have done a good job. He believes it was “about time” that Sebi voiced its concerns as regards the “froth” in the mid and smallcap stocks.

“Chairperson Madhabi Puri Buch can’t be blamed for puncturing the rally in mid and smallcaps. Sebi has been very active, and Buch did a good job calling out the excessive valuation,” he said.

Elections and markets

Markets, Sharma said, have already banked in a comfortable win for the current ruling Bharatiya Janata Party (BJP) in the upcoming Lok Sabha elections. Thus, BJP win, he believes, may not lead to a sharp rally in the markets as most of the optimism is already penciled-in in the stock prices.

One should not become too sanguine about the fate of an election, Sharma said. It does not take an economist to predict that the only way for the per capita income, which he said, currently stands at around $2,000 per person (in India) to become $4,000 per capita over time.

“If a repeat of 2004 were to happen when the NDA lost despite ‘India Shining’, I will be ready with cash to invest as it will be a buying opportunity of the decade.

That said, markets are not faithful bedfellows. They don’t care about who runs the country. Back in 2004, markets fell 10 per cent when the UPA-led government came to power; it had a sharp run-up after it. Later, markets rallied after the general election outcome of 2009 but wanted the government out within two years,” he said.

Sharma exudes this confidence on the back of India’s unstoppable organic growth story.
 

“With a country as vibrant as India, it’s not tough to predict the stellar growth in per capita income. So, a negative outcome in the elections will be a buying opportunity,” he added.

Large-cap, midcap or smallcap?

Sharma remains bullish on the road ahead for the smallcap stocks given the growth opportunities that companies in this segment have within India.

His theory is that regional companies can do better, without going pan-India as there are ample opportunities to grow within the states they operate in. Smallcap stocks, he added, are like mafia which are easier to enter but difficult to exit.

On the contrary, Sharma sees limited returns in large-cap stocks as the Indian companies don’t have much headroom for growth at the pace seen in the last decade. Nominal GDP growth, he said, is not supportive of growth in the large companies.

Sharma said that benchmark indices -- the S&P BSE Sensex and the Nifty50 -- have grown at around 12 per cent compounded annual growth rate (CAGR) since May 2014. This, Sharma said, was still 3 per cent below their long-term average growth rate on a per year basis.

“While largecap companies could grow at a rate similar to the nominal GDP growth rate, smallcap companies do not care about nominal GDP growth. India is still a smallcap market,” he said.

Largecap stocks, Sharma believes, are unlikely to make investors seriously rich, but they can surely help them from becoming seriously poor.

Investment strategy

The primary investment vehicle of a typical Indian, he said, is real estate, followed by gold and bank fixed deposits. This, he said, remains the fundamental bedrock of the average Indian.

“Though the 60:40 theory of investment is propagated by the industry, I am not a big fan of that. People may be led to believe that this is the ultimate truth, but I do not think so. Ultimately, it is about the risk adjusted returns,” he said.

As an investment strategy, Sharma advises investors to allocate a maximum 30 per cent to equities, including large, mid and smallcaps; around 50 – 60 per cent in fixed deposits (FDs) and gold. The balance, he said, can be held in cash and real estate, which he warns is an illiquid asset.

“Real estate should be bought for self-consumption/self-occupation. I advise investment in real estate as an asset class to earn returns/ flipping,” he said.