Market not in a bubble; only aggressive investors can bet on banking & financials right now: Prakarsh Gagdani of 5paisa

I believe this is not a bubble and the retail rally didn't start with the market going up but rather when there was a fall in the market. It happened in March. It is a trend that is continuing, and I believe it will continue in terms retail participation, Prakarsh Gagdani, CEO at 5paisa.com said in an interview to Moneycontrol's Sunil Shannkar Matkar.

Edited excerpt:

Q: Given the 45 percent rally seen from March lows, what is the market actually seeing? Or is it just a liquidity-driven rally?

There are various factors driving stock markets currently. First is obviously liquidity and second is by increased number of investors who are participating in the equity market actively due to the prolonged lockdown which allowed them access to markets during the day and more exposure to analysts and research.

Thirdly, attractive valuation of stocks during March and April enthused many investors including first-timers to enter into the markets. Many good stocks went down almost 40-50 percent from their highs which was quite attractive, the market capitalization to GDP ratio came down to 0.5, which was again very attractive.

Also, market has already factored the downturn in the economy and is based on expectations of an opened economy in a quarter or two. These are predominant reasons, why markets are going up.

Q: The flow into equity-oriented mutual funds has been declining consistently for last three months and SIPs have also moderated during the same period. What is the major reason behind it?

If you look carefully the SIP trend is not going up, but at the same time it is not showing a significant downtrend. On the SIP retail front is almost the same, so the retail participation in mutual funds has now died down, what must have comedown is basically the businesses which were parking their money in SIP segments.

Sometimes for large ticket investments, where people must have seen opportunity in direct stock markets compared to mutual funds, because most of the mutual fund investments was in largecaps and there is huge opportunity in midcaps and smallcaps and some of the money might have found their into direct equity investing thus.

Q: Which sectors are yet to participate in the rally and are worth looking at now?

Sectors like chemicals, automobiles, telecom, pharmaceuticals and agri-based sectors are the ones that are to be looked forward to.

Q: Many experts feel the bad loans could increase significantly or the actual picture of bad loans will be seen once the end of six-month moratorium period on August 31st, but on other side, many banks seem to be preparing well in advance by raising funds to avoid crisis time. So what are your thoughts and should one stay with banking & financials space?

Bad loans are a grey area, because of moratorium obviously a greater extent of bad loans is not reported and you have another ninety-day window. So, before January 2021 picture would be clear. Not just the retail segment but also the SME and MSME segments are hurt due to business disruptions. It is a cause of concern, and therefore if you are not looking for an aggressive bet, you may stay away from banking and financial segments for the time being.

Q: Some experts feel the current rally is partly driven by the strong participation from retail investors given the count of opening of demat accounts during lockdown to invest in equity. Do you expect the retail participation to continue to be strong or will they be caught in mini-bubble burst which some experts feel likely soon given 45 percent run up in Nifty and 44 percent in Smallcap index from March lows?

First of all, I believe this is not a bubble and the retail rally didn't start with the market going up but rather when there was a fall in the market. It happened in March. It is a trend that is continuing, and I believe will continue in terms retail participation. However, having said that retail is normally driven by market performance in the midcap and smallcap. If we see a fall in the rally then we may see decline or moderation in retail participation. However, a sustainable retail participation is here to stay.

Q: Having in a stock market industry for a long time, what is drastic change which you have seen in the behaviour of retail investors during lockdown period compared to events in the past?

There are two three things we have seen. It is not only the number of people participating in the stock markets but also the average ticket size and money that is coming in. We have seen about a 100 percent jump in the money that used come into equity investment. This we have seen both with new customers and the customers that have been there with us. Second is higher participation in the derivatives market because of the reduction in margin required the participation has increased from retail segment.