Foreign institutional inv­e­s­tors are going slow mai­nly due to valuation concerns. Right now the pri­c­es of stocks are far stretch­ed and don’t match their fundamentals, said Steven Birch, president, Willi­am O’Neil + Comp­a­ny, a US-based equity research firm that also has an 200 strong equity research team in India, in an interview with Ravi Ranjan Prasad. So, if we get a small correction, and if valuations become attractive, FIIs will again start pumping money and the market may go even higher, he added. Excerpts.

Where do you see the market in the near futu­re, given that benchmark indices are moving towar­ds record highs?

Benchmark indices posted record highs and the Nifty made to an all-time high of 10,179, recently. When the market is hitti­ng new highs, few inves­t­o­rs may get concerned and would like to identify the top to maximise returns.

The Q1FY18 earnings were impacted due to the confusion that arose over the launch of GST and ot­her macro factors like de­monetisation and slower GDP growth. Specific­a­lly, we saw weak numbers in sectors like IT, pharma, telecom and PSU banks. But when price multiples are high; our estimate is that you are going to see a rebound and growth ahe­ad. Multiples are expanding in anticipation of gro­wth. But it’s going to take some quarters and you have to let the dust settle.

The market is also supported by a strong liquidity situation arising from the constant flow of mon­ey from institutions. The market is a leading indicator and is the best parameter. We are not worried because we know great gr­o­wth stocks carry high mu­ltiples and stocks are in an expansionary mode in terms of valuation.

Domestic and overseas liquidity has driven market to levels that are looking fearsome. Should in­vestors be ready for a correction going ahead?

In any bull market, we wo­u­ld see few pullbacks and this is just a sort of no­rmal volatility the market has as it climbs. We believe the bull market has got more legs; we are fully invested and would like to take advantage of the bull market.

 What is the outlook for Q2FY18?

Corporate earnings in Q1 FY18 were muted due to two factors – demonetisation and GST. There was a lot of confusion about the proposed tax rates. The FMCG sector was hit due to de-stocking ahead of GST implementation. But things are expected to get smoother by the next qua­r­ter and we can expect a good set of numbers in Q2 and Q3. The government is also proposing some stimulus package to boost demand and drive growth. It’s expected that they co­uld use the affordable ho­u­sing route to achieve this goal and generate jobs. So private banks, real estate and select NBFC’s will perform well.

With monsoon good, so far, and interest rate po­ised to fall, do you see the market gaining further? Or are these factors alr­eady factored in the market valuations?

We had the slowest GDP numbers in the last three years. The economy has slowed primarily due to de­monetisation and GST implementation. But we had decent monsoon, so far, and in some places ab­ove normal. Inflation is so­ft, but as GST and demonetisation settle in, the growth should pick up. These macro factors take time to show effects on the economy and have also kept uncertainty ali­ve. But we believe the glo­b­al investors continue to be­l­ieve in the Indian gro­wth story and that should continue to support the overall market. We should see better growth in the coming quarters as we move beyond the effects of demonetisation and as businesses familiarise the­mselves with GST.

  Household savings are moving to mutual funds and direct equity at a time when returns from gold and real estate are not looking attractive. Will the broader market rally continue for longer even if FPIs turn net sellers?

Foreign funds were sellers for the last couple of mo­nths, and it was DIIs who were supporting the market. We advise our clients about the importance of investing in equities. We be­lieve equity will soon be considered a less risky as­set class and can see more inflows into this sector, particularly from household savings. The benami property law and demonetisation are some factors that might aid the growth of the equity market from a long-term perspective.

In general, safe havens such as precious metals will deliver better returns if the global economy itself is at risk. But that is not the situation right now. So, if the global cues remain positive going forward, gold will under perform and many investors will switch to equities. According to media reports, the employees provident fund organisation (EPFO) is likely to invest Rs 25,000-30,000 crore in equities this financial year in the exchange-traded funds. This investment from EPFO could support the market in the short-term from any near-term volatility.

FIIs are going slow mainly due to valuation concerns. Right now the prices of stocks are far stretched and don’t match their fundamentals. So, if we get a small correction, and if valuations become attractive, then FIIs will again start pumping money and the market may go even higher.

Can we say mutual funds are receiving high inflows due to demonetisation impacts?

Money is already moving to mutual funds. Many individuals, especially retirees are really worried about savings rate cut by banks. This is going to be a new normal. As RBI is cutting rates, banks cannot offer higher rates to depositors because that will impact their NIMs.

Many retirees feel further reduction in savings rates will put their finances under pressure. The rate offered by banks (4 per cent) is not enough to beat inflation. So, many feel it’s better to move into mutual funds to earn a little extra. But how much of that money will go into equity mutual fund is anyone’s guess. Retirees look for stable income and are not willing to take extra risk. Even if some 20 per cent of the savings find their way into equity mutual funds, that will be a big boost to the market. Demonetisation and the benami property law will also force people to move away from real estate and look at equities.

 Could we see good amount of profit taking by foreign investors in H22017 as the US Fed may raise rate at least once more in 2017?

FIIs are booking profits or selling Indian equities because they think the market is overvalued. This doesn’t mean they will continue to sell or stay away from our market. Even though the growth rate declined a bit in the last quarter, India is still among the fastest growing economies. India’s growth story is intact and it will remain the fastest growing economy in the world for a long time. The FIIs will return to India to benefit from this growth.

What’s your take on pharma stocks?

The pharma sector as a whole is not good, on the back of the ongoing USFDA issue. Our advice to investors will be to stay away from this sector as concerns still remain. But investors with a time horizon of more than a year can take some exposure to the sector just to balance their portfolio.

 raviranjan@mydigitalfc.com