'US stock market…' Shankar Sharma decodes Dow Jones, Nasdaq rally; his outlook for Samvat 2082 and more

While investors appear baffled by the record-setting rally in the US stock market, Shankar Sharma, ace investor and the founder of GQuant, an AI-tech company, points out what most people are missing — the underperformance of US equities compared to global markets when measured in euro terms.

In an exclusive interview with Mint’s Nishant Kumar, Shankar Sharma decodes the so-called rally in the US stock market. He also shares his outlook on the Indian stock market for Samvat 2082, Trump’s tariffs, and gold. Here are edited excerpts from the interview:

The US markets are at record highs, while Indian equities have struggled over the past year. What exactly is driving the rally in the US?

The beauty of the market is that it hides more than it reveals.

The US market is making highs, but is it actually making these highs in another major currency, for example, the euro?

When you look at the table of performance as given by GQ FinXRay, it is eye-opening!

The American stock markets have lagged global stock markets when you measure the returns in Euro terms.

It is way down in the list, and there are other markets that have beaten it by four times or more!

We need to look at stock market performance in terms of other asset classes, in particular, other currencies.

Looking at a stock market in its own currency, even if it is the US dollar, can lead to extremely wrong conclusions! For example, if the rupee were to depreciate by 20 per cent and the Indian market goes up by 20 or 25 per cent, would you be feeling happy or not so?

The answer would be clear to any sensible investor!

The fact of the matter is that there have been other markets and plenty of them that have done far, far better than the American stock market, and that is what you need to really understand.

Given the sharp rally in the US, is it the right time to invest there, or do you think the market has become too overheated to sustain these gains?

In my opinion, there is at least one market that is far, far better than the American stock markets, and I have been well invested in most of them for the last one and two years.

Both India and America came up as markets that would not do well, whether in absolute terms or in relative terms, on my “Lake of Returns Theory” back in the middle of 2024, and the performance of both of these markets is not surprising in the context of what the Lake of Returns Theory postulated.

Of course, America is the biggest stock market in the world, and one should never have zero investments there, but all I am saying is that in terms of allocation, there are plenty of other markets that merit higher investments than America.

As we step into Samvat 2082, what’s your outlook for the Indian stock market? Should investors brace for modest returns or expect a revival?

The Indian stock market has delivered, as per my expectations, all those that may not have been the expectations or, more accurately, the hope of domestic investors, in the last 15 months.

India has lagged almost every market massively in the last 15 months. When you measure it in dollar or euro terms, the performance is even worse.

Given this huge underperformance, there may be a chance of some catch-up and counter-trend move by India.

I remain extremely bullish, selectively, on Indian small-cap stocks. I continue to look for opportunities in this space, and I also put in significant capital in the last 12 months in the Indian small-cap space, both in the listed and unlisted markets.

You see, what is important is to understand that investing is not an all-or-nothing game.

I may not be super bullish on America or India, but that does not mean that I have no investments or that I am not looking to deploy more capital into these markets.

Most new investors are inclined to think in all-or-nothing terms that if somebody is negative on a market, that means he has zero investments in that market.

That is not the way the game of investing works.

The game of investing is simply like the dial on a radio volume control.

You just gently increase it or decrease it, depending on your judgment. Very rarely will you decrease it to zero, especially in markets like America or India.

What, in your view, are the biggest challenges facing the Indian stock market today? Are these headwinds largely internal or driven by global factors?

There has been a massive bull market in the last 15 months across the world, with probably the only exception being India.

And the reason for that is simply that the preceding Bull market in India was driven by extremely high fiscal deficits driven by government capital expenditure.

When you are growth is driven by pump priming by the government, that kind of growth has limits.

The moment you begin to dial back on the fiscal deficit, you will start to see a slowdown and growth, and that is exactly what has been happening in India in the last one year and slightly more.

However, what is more surprising is the fact that people appear surprised at this slowness of growth in India.

But the reality is that back in the 2023 Union Budget, the Finance Minister had very clearly outlined the fiscal glide path, which would take the fiscal deficit down substantially by 2025 and beyond.

It did not take a genius to figure out that if the government was going to dial down on the fiscal deficit, growth would definitely slow down.

What I mean to say is that all these current problems could be seen by even a BA first-year economics student who was appearing last in class.

It is indeed very surprising why everybody appears so surprised at India’s slowdown today.

India’s issue is that corporate earnings growth has slowed down substantially, becoming more like the corporate earnings that we were seeing between 2014 and 2020, when the government capex was not of the current size and scale.

Our large companies will derive growth based on government spending.

The smaller companies can find growth from other areas, but the large companies remain very exposed to broad growth in the economy and the broad growth in the economy is driven by capital expenditure, at least in India.

You’ve attributed India’s market underperformance to weak economic growth. How do you assess the current macro landscape, and what steps could strengthen it?

The GDP growth data in the last two quarters has been extremely worrisome. We are growing nominal GDP around 8 or 9 per cent, which is far too low for a growth economy like India.

India needs nominal GDP growth of between 12-to-15 per cent because corporate revenue and therefore corporate profit growth is directly an outcome of nominal GDP growth.

In fact, the real question to ask is, if nominal GDP growth is between 8 and 9 per cent, why are corporate India’s profits growing only at around 5 per cent or less?

Is it that the nominal GDP growth number that we are seeing is not very accurate, and in reality is probably much lower?

During our Budget interaction, you mentioned that Donald Trump posed a greater risk to the US than to the rest of the world. Has your view evolved since then?

I have had time over the last year to go into the history of America, particularly on the trade front.

Based on this, I wrote an article recently in Business Standard, another financial newspaper. What came through based on my analysis of the long-term history of America was that America has almost always been a high-tariff country.

This is contrary to what most people believe. It is only from the 70s that America started to reduce tariffs aggressively, and that is where the route of the current problem started, when America, from a surplus country and a net creditor nation, started to become a deficit country and net debtor country.

Tariffs made America a massive manufacturing success in the era prior to the Second World War, and that is exactly what Donald Trump wants to recreate.

Think of America as a giant platform with a mass base of consumers. It is asking all the sellers on the platform ( countries) to start paying higher listing fees and other charges if they want to access the customers of the platform.

The platform itself has a massive cash burn, and the only way any platform with a massive cash burn can become neutral is by increasing the take rate, which means increasing what it takes from the sellers on the platform and also from the buyers on the platform.

That is exactly what America is doing.

When you start thinking of America like a giant platform, then you will start to understand that there is inherent logic in what it is doing.

The platform is there to serve itself and not to serve, especially the sellers on the platform.

The data so far is that America is getting a lot of revenue from the tariffs. And my view is that no matter which administration comes in future, it is going to be extremely hard to reduce tariffs given the impact they are going to have on correcting the imbalances in the American economy.

What kind of investment strategy would you recommend at present? Is it time for investors to increase their allocation to safe-haven assets such as gold?

I have been extremely bullish on gold. In my opinion, global equity markets look extremely bullish, and therefore, I would continue to deploy more and more capital into global equities.

Indian small caps, from my perspective, look very, very good, assuming you are being selective and doing good research on them.

Looking ahead to the next one to two years, which sectors do you find most attractive from an investment perspective?

I am very bullish on Indian technology companies, which are small in nature but are building tech which can become game-changing out into the future.

Investing in such companies is always going to be extremely risky, and therefore, I would not advocate this to retail Janata.

But if you have a decent understanding and you can spread your risk across several companies, I think you are going to be rewarded by some major winners in India over the next few years.

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Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of the expert, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.