India's GDP growth may outpace China this year: Shankar Sharma
For all the chini jingoes
In an interview with ET Now, Shankar Sharma, Global Trading Strategist, First Global, talks about the Indian and global markets as well as the sectors to watch out for in the Indian market and says that India's GDP growth numbers will outstrip those of China this year. Excerpts:
ET Now: We got the December call right. December is over, this is end of February. What is your market call now?
Shankar Sharma: This will be a seminal year for Indian equities relative to global equities and emerging market equities. This year will be a breakaway year for India. After spending 4.5 years in a bear market, my sense is that India will go back to being a market that everybody wants to be in rather than this scepticism that we have seen throughout the last quarter of 2011.
There continues to be a lot of scepticism amongst global investors about India with the rally and macro and current account deficit. The market will climb those walls very easily and we will end the year a lot higher than where we are now. We will do much much better than almost every other equity market of consequence.
ET Now: We are already up 20% for the calendar year. Will you be surprised if the benchmark indices add another 10% to 15% for the rest of the year?
Shankar Sharma: No, I will be surprised if they do rise that much. My sense is that we might get a situation of markets taking out their old highs of 2007 or 2008. Coupled with a strong rupee, we will see in dollar terms the market doing phenomenally well as opposed to last year when in dollar terms we were down 30% or 40%. So this is an exact contrast year for India and we are very optimistic.
ET Now: In December you had indicated that markets will not fall and now you have indicated that Indian markets will touch a new all time high this calendar year. What is fuelling this optimism?
Shankar Sharma: Last year almost everything that could go wrong went wrong.
We had the Anna Hazare movement that completely paralysed the country's decision making and put the fear of God within even honest ministers and bureaucrats. By some estimate, it cost us 1% to GDP growth. So, the policy logjam was not the government's fault, it was the fault of the fear psychosis that got created by that movement. Thankfully, that is behind us now. We had very high interest rates and high inflation. Furthermore, we had poor capital investment.
Overall, it is hard to repeat those years particularly for a country which is reasonably well managed like India. The moment we see some relaxation coming in all of those fronts, be it interest rates or inflation, we will see that in a bad year, we still did 7-7.1% GDP growth. Imagine if those very stretched out economic and monetary conditions were relaxed by even a wee bit, the resilience of India's economy is so much that we will see a big bounce back on the GDP growth numbers. So, I would not be surprised if by the end of this year or by Q4 of fiscal 2012-2013, we will see the GDP growth
go back to 8-8.5%. [FOR OUR CHINESE JINGOS
]Our big call is that this year India's headline growth numbers of GDP will for the first time in living memory outstrip that of China.
China is headed for a very poor patch of economic data.
India is not looking at all anywhere close to that. India's economic model is probably the best that I have seen of any other country of size and consequence. Those differences will come to fore this year when people realise how robust India's economic growth model is and how hollow China's growth model is. So, we will see headline growth numbers on GDP from India outstrip that of China. Therefore we might grow at 8-8.5% and China will probably grow not more than 7% this year, if not lower than that.
ET Now: First Global is talking about China being a Ponzi scheme. The world is betting whether it will be a soft landing or a hard landing for China, but First Global is of the view that China will see a crash landing. What are your thoughts?
Shankar Sharma:
There is no soft landing in an economic model that China has run, especially when we run a business run fuelled solely by debt. 
Everybody has had this notion that China has grown without debt and there is a very low debt to GDP ratio. All this is complete nonsense. We have gone into the greatest amount of detail on this.
The real number that China has by way of debt to GDP is something like 150-160%. This number will worsen in the next 2 or 3 years' time to 180%. That is assuming that they do not have a huge NPL problem.
Our sense is that they will have at least 40-50% nonperforming loan problem. The other problem that might crop up is that faced with a slowdown, they will again try and inject a lot of money and pump the economy in the classical Keynesian method. Both of those situations are terrible for the economy. Assuming that one out of those 2 things will happen, China will still end up with 180% debt to GDP ratio in the next 3 years.
Assuming both will happen, we are looking at a 200-220% debt to GDP ratio. That is like Japan. So, countries that run up debt to GDP ratios of that kind simply cannot continue to grow. We assume China belongs to another planet. It does not have to subscribe to the laws of economics. However, there was another country exactly in the same boat, which is USA. They kept running up huge debt-laden booms throughout the last 30 years. We know how that has ended.
ET Now: So if China goes under, what happens to commodities?
Shankar Sharma: Commodities are a short. Of our big global macro themes, commodities are definitely the place that we do not want to be long on, be it in Indian commodity stocks or global commodity stocks.
ET Now: The US is in a problem. Europe is in a mess with European consumers being exhausted and if China slows down further, what will board for global markets?
Shankar Sharma: Everyone has its own problems, be it affecting global economic growth rates or the ability of China to buy more debt of foreign governments. China has been running a debt-fuelled boom at a staggering scale and by our estimate they will have $22 trillion of debt in the next 3 years. When you run up numbers of that magnitude, the only problem is that nobody will come and tell not to do it.
The US would not come and tell not to grow and not to create surpluses because it is in the US's interest that they create those surpluses so that the bonds can be bought. Europe will also come and tell to keep growing so that you had some surplus to put into us as we need a bailout as well. No multination will come and tell you that you are growing just based on debt and this is not sustainable.
Furthermore, the investment banks would not come and tell not to grow like this because they want to do the China Light & Power, Agricultural Bank of China. All the banks will require another capital raising once the bad loans come to roost. So, none of these houses from Wall Street are going to ever give a call like that. It is only going to be some crazy guys like us or some hedge funds in the US who will say the way it is.
We have come to a situation where people have focused too much on China, too little on India and given us too little credit. The biggest problem is that most people do not analyse properly. They just go by the big headlines and conclude that we have got a fiscal deficit problem and that China keeps growing year after year. It is time that we become more analytical about these things and this is our attempt to start doing that.
ET Now: So, the big bear now is now the big bull. Let's nail it down to themes, ideas, sectors which to your mind have potential to outperform Indian markets this year?
Shankar Sharma: Our favourites still remain the auto pack, both the 4 wheelers and the 2 wheelers. We have been bullish on them for quite a few years now. If we go back and see from the peak of the markets in 2008 January till today, the best performing sector is auto. So, the trade has worked out quite okay from a strategy perspective. The second sector we like is the PSU banks because the NPA problem is exaggerated. They will come out of it. While they have run up a great deal and we like them from the beginning of the rally, we still think there are plenty of legs in that space.
KEEP CRYING JINGOES
India's GDP growth may outpace China this year: Shankar Sharma - Page 2 - Economic Times
