Bull rocks the street

In the last one year Pramod Gubbi, Head Equities at Ambit Capital has brought down his equity investment by 75 per cent. Investing in mutual funds through systematic investment plan (SIP), Gubbi is currently investing only 25 per cent of his money in equities. Says Gubbi, "Across the board we can't justify valuations. Fundamentals don't support valuations. It's not a cheap market and we have even suggested our investors to book profits and stay on sidelines and wait for the entry point when market corrects. Until we don't see a correction of at least 10 per cent from current levels or investments picking up in sector which will lead to capital formation I don't think we will be a buyer in this market."

But market doesn't seems to be obliging Gubbi which has hit a new 52-week high on Friday, March 17, 2017 to 29,824.62. The BSE Sensex is trading at a two years high and is short of 200 points or 0.7 per cent from touching an all-time high. Last time the BSE Sensex touched its all-time high was two years back at 30,024.74 on March 5, 2015. "Fund flows, sentiments and fundamentals are all working in favour of the Indian markets and therefore it's not surprising that the market is scaling new highs. This market has risen on lots of hopes and far less greed," says Nilesh Shah, managing director & CEO at Kotak Mutual Fund. He adds, "Earlier the risk was event based from demonetization to union budget and UP election. All the three events have turned positive for the markets. After the initial impact of demonetization in the month of November and December, there wasn't much impact of demonetization in January and February. Similarly the fiscal prudence maintained by the finance minister in his union budget for FY 18 and BJP government winning the crucial UP election on back of jobs, development and growth agenda as against caste politics has been cheered by the market." He adds, "The reason why market has given a thumbs up is because the sentiments has improved on the hopes that the government will today be able to deliver on labour reform, improve the ease of doing business in India, recapitalize the banking system and improve the NPA situation."

There is no doubt that this market is riding on back of strong flows from domestic as well as foreign players. Since the beginning of 2017 the BSE Sensex on back of sustained flows has jumped over 11 per cent, higher than the last two years returns of 7.8 per cent since December 31, 2014. So far in 2017, FIIs have invested $3.7 billion, while mutual funds have pumped close to $1 billion in India equities. Says Gubbi, "Markets can even scale higher on flows, however concerns are the rise is not supported by fundamentals and therefore it a huge risk when the flow of money dries.  Fundamentally the corporate earnings aren't giving the confidence to buy this market. So far reversal in corporate earnings growth is not on the horizon. Even on FY2018, the growth of Sensex companies aren't going to be more than 10 per cent." Agreeing with him Abhay Laijawala, Head of Research, Deutsche Equities, said: "Over the past few years, in the absence of earnings growth, markets have not been able to break out from levels where valuations have been trading over 17 times earnings. Despite the surge in liquidity, it will be difficult for market to sustain at these valuation levels when it's not supported by earnings growth." Laijawala adds, "While markets discount the future earnings growth, today we are still in an environment where we aren't seeing an end of earning downgrades. For the past three years market is waiting for the earnings to pick up but it's failing market expectations. Even for FY2018 expectations consensus have come down from 26 per cent to 18 per cent by February 2017 and my guess is by the time GST is implemented the earnings estimates consensus would fall to 10 -12 per cent. In such an environment we recommend not to chase markets."  

Pure liquidity driven

Global events can cause hiccups but it's not going to have a major barring on our markets, be the US rate hike or Euro-zone crisis. Says Shah of Kotak, "With domestic flows being strong my concerns are it should not push the market in an overvalue zone. Today mutual fund receives Rs 4,000 crore every month through SIP, which was Rs 2,500 crore a year back. For the first time in my quarter of a century in market I have to pray that foreign institutional investors should play a balancer role in the market and turn seller, otherwise with limited supply and sustained money flow our markets can be on fire." What the market is witnessing is a structural shift in household saving. According to a recent report from Deutsche Bank it is estimated that annually anywhere between $8 billion to $24 billion will come from Indian household into Indian equity markets.

What demonetization has done is it has got cash out from the tijori to the banks. Says Shah, "Cash in circulation which was 12 per cent of GDP on November 8, 2016, if it can be brought down by 2-3 per cent and that money stays with the banks it can add a multiplier effect to the bank credit that can easily add 10-15 per cent GDP as additional credit with multiplier effect.  The reason why China is over 5 times bigger than India is because they pumped credit in economy whereas we failed to create commensurate credit. What demonetization does is it created an opportunity to create credit growth in the country which will fuel economic growth."

With most of the domestic events begin played out, market will take a cue from corporate performance and on hopes of a pick-up in the earnings growth. So what next?

"For momentum players they can take a call to play this market but they have to know when to pullback before the reversal of flows. There is huge uncertainty in such high risk strategy," says Gubbi. "For those investors who do not want to build cash levels and stay fully invested, we recommend a sector re-allocation strategy rather than chase the broad based market," says Laijawala who feels at these levels any negative news and event particularly global events can sharply pull down the market. After all 55 per cent of Sensex earnings is still dependent on global factors.

However Shah is still confident of buying the market. He says, "I will be a buyer in this market. But will not invest everything in one go. Choosing systematic investment route is the best option as market isn't cheap. However saying that you won't find market valuation drifting to low levels seen in mid of 2013 or 2008. In the short-term it is difficult to predict where the equity markets are heading but certainly we are in a long term bull market which can be at times volatile. Would prefer multi-cap funds as it helps diversify a portfolio. If one can digest volatility, this market will reward patient investors."