Fair today: Samvat 2081 could be much more challenging for investors than expected. After four strong bull market years, markets often slow down or take a breather in years five to six, potentially delivering only moderate returns, says Shankar Sharmatop investor and founder of GHow muchan AI technology company. In an exclusive interview with Mint’s Nishant Kumar, Sharma shares insights on key topics that are likely to be on every investor’s mind, from the outlook for the Indian stock market to the impact of the US elections on India and the outlook for Chinese markets.
Edited excerpts:
How would you assess the performance of the Indian market this Samvat? Did it meet, exceed, or fall short of your expectations?
India’s performance over the past year has been exceptional to say the least and, to be honest, slightly above my expectations – not that I’m complaining! But that’s just the way markets are: they never perform as expected. They’re up or down!
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What are your expectations for Samvat 2081? Are there reasons to be optimistic, or do you foresee major challenges on the horizon?
I think the coming year will be much more challenging than investors are willing to accept.
First, we’ve had four amazing bull market years, and usually bull markets tire or retire between five and six years.
That’s a very good reason why the stock market animal is a bull or a bear: they are both very heavy animals, not very agile, and meant to run very fast, but over short distances. Unlike a horse, which is skinny and meant to run very fast over very long distances. Bulls need to catch their breath, and they usually do so between the fourth and sixth years of a bull market.
It doesn’t necessarily mean a bear market. All it can mean is a year of moderate to negligible returns.
The problem is always perception. If you get used to an annual return of 30 percent over every four year period, and then we get to a year where we only earn 5 percent, it looks like a bear market!
I am keeping my expectations for the coming year very realistic and low, and therefore the disappointment, at least for me, may not be great.
However, I am not sure that this is how the vast majority of Indian investors will view the markets over the next twelve months as expectations are very high and probably unrealistic.
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What investment strategy would you recommend for the current market environment? How can investors identify opportunities in the large, mid and small caps?
For me, the large-cap segment is absolutely not interesting, because these are companies that have already grown extremely large relative to the size of the economy, and the available space for major growth is extremely limited.
For example, choose HDFC Bank, Asian Paints or similar companies, and in all these companies you will have seen moderate growth in recent years.
Trees simply cannot grow to the sky, and these companies now contribute a large portion to the market’s profit pool.
There are limits to how much they can grow in the next 12 or 24 months.
These types of stocks are only for mutual fund managers who want to protect their jobs because no one will get fired for buying Asian Paints or HDFC Bank.
That was the case with IBM a few decades ago, and we all know how IBM ended up.
For me, it’s small caps and even smaller caps, and I’m willing to take the risk and significant losses that come with investing in small caps.
However, I am a professional investor and I have suffered losses during my investing career that have been heartbreaking.
It is precisely such experiences that have made me a more resilient investor, as I have been seeing such cycles for 35 years now.
Therefore, if I lose money in a small cap, I don’t have any mental or emotional problem because I take it as part of the investment risk.
Investing is all about risk, because if you’re not prepared for the risk, put your money under the mattress and hope your partner isn’t there to steal it.
Therefore, my investment strategy for the next twelve months remains unchanged, which is to buy a basket of 25 to 50 small and very small market cap companies.
I do know that even in the worst markets, I will end up with at least five stocks that deliver huge returns and will more than make up for the losses I make in the bad markets.
I’ll get the bad one, because you can never be too sure about the governance and quality of accounting in small cap investing.
As long as you are clear about what you are getting into, you should have no problem dealing with losses as the profits more than compensate for such losses.
Also read | Expert view: Expect moderate returns from Indian stock market in Samvat 2081
Do current valuations provide sufficient comfort after the recent correction? Or would it be wise to wait for further corrections before making new investments?
In the 30 years I’ve been watching them, Indian valuations have always been much higher than most emerging markets.
There is usually a good reason for this, namely that Indian companies achieve much higher returns on capital than most emerging market companies.
However, it must be said that in the current bull market, valuations for even extremely unhealthy companies have reached insane levels. For example, solar and other renewable energy sources are in deeper markets elsewhere in the world, but are emerging in India.
Whether this share price boom will continue two years from now is a big question mark, especially given the nature of the business and its crazy valuations.
Of course, my investing experience has also taught me that making market judgments based on valuation can be very dangerous, because valuations can stretch far beyond what the mind is willing to accept.
What I also know is that many of these stocks will become “reverse compounders,” as I call them, stocks that continue to rise 50 percent on their way down!
I’m fine if there is some degree of overvaluation, but if things are being valued insanely, I’d be better off sticking to fixed deposits.
How much weight should investors give to macroeconomic events, such as Fed rate cuts and elections, when shaping their strategies?
Elections do not matter to the markets except around election time, whether in America or India, because most political parties have converged on the same or similar economic policies over time.
It is mainly the rhetoric that drives the election campaigns, but once someone is elected, the policies become more conventional, which is pretty much in line with most people.
The interest rate policy of the US Federal Reserve is of great importance to markets worldwide because it also drives the movement of the US dollar to a large extent, and the US dollar drives stock market returns much more than people understand.
In fact, if you move towards the US dollaryou can predict the most stock market returns!
Are you currently also considering the Chinese markets as a potential investment opportunity?
I have been optimistic about China for the past three months and have been richly rewarded.
I remain positioned in China because it fits my style of investing, which is to put a fair amount of capital into stocks, sectors or countries that are generally avoided by people, what I call my ‘4 AM strategy’.
The 4 AM strategy is not for everyone, and certainly not for the faint of heart! You can go wrong with the 4 AM strategy, but if you get it right, you’ll end up looking like a rabbit!
China is one such market because it has been underperforming for a long time. I think the economy is at an inflection point and returns from China could far outpace returns from India in the coming years.
Of course, I still have a lot of India in my global portfolio, so I’ll be happy if both do well!
With Q1 25 earnings weak and Q2 results getting even weaker, is it time to approach the market with greater caution?
Absolute! And we also need to be careful about GDP growth rates, because I believe we are in for a moderation in GDP growth rates as public investment slows. I even predicted this two years ago because the government will necessarily have to reduce the physical deficit.
The only way they can reduce this is to cut capital investment, and government capital investment is the bullet that has driven this bull market train. But the bullet itself is running low on gunpowder, which will dramatically reduce the speed of this train.
Which sectors do you see as having strong growth potential in the next one to two years?
My approach is not sectoral at all. My approach is all about diversified small-cap investing, and from there it becomes a statistical game with probabilistic outcomes, where at least 20 percent of a well-chosen portfolio of 25 stocks will be two or three times the market. returns and the middle of the back will be slightly higher than market returns, and then they will be 20-25 percent of the portfolio that will lose between 25 and 50 percent.
Once investors understand that investing is nothing more than a game of statistical outcomes and absolutely not a game of certainty, they are already on their way to becoming very, very successful investors.
It took me time to understand this very simple logic about investing, but since I understood it, my investing journey has become smoother, with no bumps, no hiccups, no emotional pain, and no sleepless nights. Because then you understand what this means. The game is about accepting losses that are inevitable during the investment journey.
However, the way we are taught to invest in India is that everything has very predictable results, and nothing can be a bigger lie in investing because no one can predict, especially about the future!
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