Small Caps A ‘Good Place To Be In’ For 2021: First Global’s Shankar Sharma

The decline in interest rates across the world and movement in the U.S. dollar will ensure that money moves towards equity and commodities in emerging markets. Within equities, the riskiest assets will earn the best rewards, the portfolio manager told BloombergQuint’s Niraj Shah in an interview.

“Small caps as a category will be a good place to be in, in 2021, in India.” Large caps, in comparison, will show a “patchy” performance, he said.

Sharma, however, expressed concerns over India’s stock market performance compared to global peers, given it has been one of the most popular destinations for funds over the last two months. The Nifty 50 has grown 20% since Oct. 30. The Nifty 100 index, too, has had a similar run.

“Brazil and Russia are up 40% in the same time period, while not having inflows anywhere close to that India has had,” Sharma said. The $10-20 billion India received should have “propelled this market up, I don’t know, [by] 50%”. Investors, he said, must not look at inflows as an indication of the stock market’s direction. “It’s the dumbest correlation.”

One of the reasons for India’s underperformance that the markets have discerned is the economy’s journey back to growth will be a long one, Sharma said, adding it needs to get its economic act together for its equity markets to really deliver.

View On Sectors

Financials

• Indian financials have been terrible.
• The bank index has been up 2% year-to-date, most banks are flat or still down for the year.
• Indian banks have benefited from the moratorium.
• Under the cover of the moratorium the banks have taken the opportunity to rally but when you open the cover and pry inside the reality will not be as pleasing.
• Sidestepping the financials for now.
• “Right now we find far better places to put money.”

Information Technology

• IT will continue to do well.
• The dollar has weakened against all emerging market currencies, barring India
• The rupee has been one of the weakest currencies in the EM basket and will remain weak.

Contract Manufacturing

• Contract manufacturing can be good done right.
• Has a low margin, one of the oldest businesses known to mankind.
• Given there aren’t a lot of options, people will move towards these stocks.
• People want to move from China to an extent and some of that capacity will seep into India.
• “To some extent the (manufacturing) story is right and to some extent, it will play out but let’s not always believe in India that everything plays out perfectly. That only happened with IT services.”

Pharma

• Pharma in India is not a new sector. “We have played API too.”
• Old wine in a new bottle, shinier bottle.
• Believe pharma continues to be a good space but there is no reason to make a big shift towards it.

Real Estate

• Don’t understand why anyone would pay 7-8% interest for a property which has a 2% rental yield unless they see a big boom happening in the future.
• Might see a cyclical recovery in real estate but it will not be sustainable.

Watch the full conversation here: