Huge inflows to sustain rally; gold still a top pick: Anup Bagchi, ICICI Securities

In the short-term, the current market upmove will sustain because of huge in flows from both foreign and domestic investors, says Anup Bagchi, MD, ICICI Securities. However, in the medium term, returns will depend on earnings growth. The only way to absorb the large inflow at the current point of time is with large share sales, he told ET, in a recent freewheeling chat. Edited excerpts:

How are you reading the market upmove? Are stocks overvalued?

There is a lot of liquidity in the market. For the first time after many years, primary and secondary markets are moving in tandem. If you look at the demand-supply, the supply of money is very high.On the mutual fund side, Rs 3,000 crore per month is coming through SIP, which incidentally, in 2008-09 was barely Rs 150-200 crore per month. That makes it about Rs 50,000 crore per year. Plus you have EPFO (Employees' Provident Fund Organisation) putting Rs 6,000 crore per annum. So, if FIIs (foreign institutional investors) are selling, then that will get absorbed. If you just look at the demand-supply, demand is very large. Where does it get absorbed?

Either you come out with IPOs (initial public offering) or QIPs (qualified institutional placement) or the government does large disinvestments. FIIs are not selling and absorption is barely Rs 15,000 crore by IPOs and QIPs. Essentially, Rs 25,000 to Rs 35,000 crore worth of money will go in buying stocks.There are companies that have good, healthy balance sheets, they are trading at crazy multiples and there are companies where balance sheet is stretched and nobody is putting money there. So, what is happening is that the good companies are really getting traded very well and bad companies are not getting capital.

What is your mid-term outlook?

In the short run it is all demand-supply. Even if there is a correction, may be because of global events, it is not going to correct too much.Even in this volatility, SIPs (systematic investment plans) have not got impacted. Basically, you have a floor of Rs 3,000 crore which is why the correction is not going to be very sharp initially. Even if there is a sharp correction there will be enough buyers. But in the medium term, returns will depend on earnings growth. There is no getting away from it. So, what can happen is people will start to take profits if it becomes very expensive and cash levels will go up. If cash levels go up then underperformance will start.

Are you saying that the stock market rally is not sustainable?

Rally has sustained so far only due to money supply, which is likely to remain robust. This time the paper supply has not risen so far to match the money supply. So, as long as money supply remains robust, the rally in stock markets may not die down.

How are foreign investors looking at the markets (post the rally) now?

Globally, everybody is frightened to see a changed new world, where investment in bonds is for appreciation benefits and stocks for yield.This is a consequence of negative interest rates. But now chasing high yields has created credit risks, which many of them are not comfortable with. Therefore, allocation to gold has increased.

Is it the reason why gold prices have seen a rally recently?

Gold prices rose recently due to the turmoil in Europe. Gold may remain as a preferred asset for investment in the time to come as global investors are finding it risky to hold other financial assets over a longer dura tion of time. For instance, this year investors started chasing high yield market but then they realised that they ended up taking credit risk, which is worse.

What about other asset classes?

Everybody thinks that interest rate will go down from here onwards or at best remain at current levels.There is low probability that government securities will touch 9%. But reasonably high probability that either it is going to remain like this or maybe marginally come down.Tax free bonds are at 6.5%. Unless there is a crisis globally, gold doesn't go up. One year bank fixed deposits are also not going up because credit is not picking up.The mind is still anchored to 8%.Then you have properties which is not giving you any return for very long time now. If you have money where do you invest is the question?

And which is why this flow is happening into equities.