Canary in a Coal Mine!

True to its name, securities firm First Global has operations world over. Not only is it a member of the BSE and NSE, but also of the London Stock Exchange and the National Association of Securities Dealers. The firm researches and trades stocks across the world for its institutional clients and has to its credit many seminal calls on the markets, such as the end of the tech boom late 2000 and the start of the Euro rally against the dollar late 2001. In December 2007, the firm turned negative on India. The rest is history. Shankar Sharma, speaks to Larissa Fernand on why he thinks India is in a bear market and what made him make the call ahead of the rest. In September 2007, you said you saw a market situation over the next six months where index levels would get taken out successively. And you also said you saw the Sensex moving to 20,000 and 30,000 levels. When did you change your view? Around August-September last year the Sensex was at around 14,000-15,000. When the P-Note incident took place we were at 16,000. So from there we were certain that the market would move to a significant level. It did hit 21,500. So the market did rally around 50 per cent from there. When we comment on the market, we take a view at a point in time. So at a point in time I may take a view that the Sensex may move from X to Y. Now when it reaches Y and the factors that contributed to the rise are still intact, then I would continue with it. But if I notice that various changes have taken place and it has already moved significantly, then I may be forced to reconsider my view. We turned negative in December 2007. In the first week of January 2008 we wrote to our clients and informed them about our change in view. What were the factors that forced you to change your stance?Valuations in the Indian market. The over exuberance attached to the market at 21,500 was completely crazy. The current account deficit. Now the price of oil too is a concern but we looked at it ahead of the market and it made us cautious. Around December 2007 and early January, we said that this year would witness around 7 per cent GDP growth. The finance minister was still saying 8.5-9 per cent. In fact, that was the street consensus. But now with the inflation, interest rates, rise in crude oil price and deficits surfacing, the consensus is moving towards 7 per cent. But if we change our view after the numbers have become real, we are too late anyway. We have to be one step ahead. You also changed your view on the US market. We were negative on the U.S. for the past two years. But in the last couple of months we turned positive, particularly in the U.S. technology space. Now we think that the people generally have an extremely negative view on the U.S. and this is creating opportunities. At a time when there was an extreme view of optimism on India and China, we changed our views on these markets. In November 2007 we said that China was going to be a huge problem market and from there it has been down 50 per cent. What is it about the India story that scares you? The macro view is extremely disturbing. In fact, it is a very scary situation. Besides deficits on the fiscal side, we have deficits on the oil, food and fertiliser subsidies. All these deficits were at a moderate level. Now because of price inflation of crude, fertilisers and agricultural commodities, these deficits have swelled to account for 10 per cent or so of GDP. This is besides the current account deficit of 3.5 per cent of GDP. So we have moved from a well managed fiscal and external account situation to a dangerous one. A combined deficit of 14 per cent - fiscal and current account - is a scary number. With such deficits, it is not possible to reduce interest rates. Since the government needs that much of money to fund that deficit it will be a borrower in the market. With such demand, interest rates will rise. That in turn means that the benchmark for corporate and individuals to borrow has gone up