Volatility in the markets shows no signs of settling down. Contrary to several analysts, Enam Holdings’ Investment Director Sridhar Sivaram believes India is in the grip of a bear market phase. It’s time for investors to preserve capital.

Speaking to Bloomberg TV India , Sivaram says the government needs to focus on boosting consumption. One of the easiest ways to stimulate the economy would be to pass on the benefit of falling crude oil prices to consumers, as the GDP-multiplying power of the private sector and consumer is far higher than that of the government, he said.

How do you assess the Indian market?

I think the genesis of India entering a bear market comes from the fact that the asset class, which is the emerging market, is itself in a bear market. Emerging markets are down 50 per cent from their peak in 2011. And in the last one year, they are down almost 25 per cent.

And the other reason to say India has entered a bear market [phase] is because if a market corrects about 20 per cent, it is defined as having entered a bear market. But there are other elements to it: India’s earnings growth has been very poor. We have had a downgrade cycle for two years and typically a bull market coincides with strong earnings growth. This market has no signs of a bull market. At best, we can say we had a cyclical move up some time in 2014 because of various reasons, including falling crude prices. And there was that hope trade. And unfortunately, that hope trade has not really played out as most would have wanted. Now the markets are correcting.

You think it is the lack of the earnings growth is a key reason we are where we are?

Yes, earnings growth is one of the big components to this as I have always said that markets are slaves of earnings. So if we get strong earnings growth, irrespective of what is happening in the emerging markets, our markets could have moved higher. However, we are not seeing any of that because of various reasons. Demand growth has been extremely poor. Some of the reform that the government has initiated – I will not say they are not there at all – has been slow and taking time to have its impact. So the earnings growth is extremely poor. And what is even scary is that even though the expectations from the brokers and research analysts is almost 18 per cent for next year, that seems very high to me. At best, we will get another year of single-digit earnings growth. So the realistic expectations look very low right now.

What has really changed the earnings scenario?

Even in 2014, earnings growth was very poor. So it was not as if earnings growth has collapsed. We have had single-digit earnings growth for the last several years. It was just that the macro economy of the country improved drastically.

With fiscal deficit starting to come down and the current account deficit, which was a huge problem in 2013, improving significantly, the RBI focused on inflation and it moved down. So combination of macro factors plus the fact that there was a new government resulted in the euphoria in the market. There was an expectation and there was a honeymoon period, which lasted about 12-18 months. Now, there is a reality check. Unfortunately, the reality check is not looking that great because earnings recovery has still not come about and many of the reform measures, which were expected by the market, have got delayed. As a result the valuations are much higher than what you would pay, when earnings are so poor, which is the correction we are seeing right now. If we don’t get back on to earnings growth in next 12 months, we will see a lacklustre market. And we should keep in mind that the global headwinds are still very strong. We still don’t know what is going to happen to China in terms of their currency adjustment, the interest rate hikes in the US based on what we heard from Janet Yellen will continue and Europe is still very fragile. The environment for investing is very challenging right now and one has to be cautious.

When do you see earnings growth coming back? What can the govt do to recover earnings?

We have been pushing back the earnings growth expectation by 12-18 months. I think the government needs to focus on consumption. One of the easiest ways of giving a quantitative easing to India would have been to pass on the benefit of falling crude prices to consumers. The GDP multiplier of the private sector and consumer is far higher than the government. The government has taken away 70 per cent of the benefit of falling crude prices as taxes. Had they passed that on, people would have consumed more and economy would have recovered faster.

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