The assets under management of mutual funds in May fell 1.5 per cent to ₹19.03 lakh crore for the first time in several months, largely due to higher redemption in liquid schemes. However, inflows into equity schemes hit a two-year high of ₹10,790 crore taking the AUM to ₹5.83 lakh crore. Atul Bhole, Vice-President — Investments, DSP BlackRock Investment Managers, spoke to BusinessLine on what lies ahead for investors. Excerpts:

With lots of uncertainty on growth prospects, do you see further upside in the market?

Markets have rallied quite a bit in the last six months. If you look at valuations it has reached more than the historical average. Though I do not fear a meaningful correction, justifying an upside within 12-18 months is also not possible. The mid- and small-cap stocks have rallied a lot in the last three years. In fact, an upside in these stocks is more difficult as they are trading much above their valuations.

Indian markets have a set of companies which always do well and there is another set not doing so well due to cyclical reasons. I do not expect a sharp correction in the market because some of the cyclical stocks have started showing signs of revival. Also, we expect the interest rate to go down.

Is the market over-priced with no meaningful improvement in corporate earnings and GST kicking in?

The aggregate market multiple of 18-19 times is not very out of whack. We have traded at multiples of 20-22 times in the past. At the Nifty and Sensex level, we are perfectly okay and not very expensive. But there are lot of valuation anomalies if you do a deep down analysis. For instance, some of the consumer facing stocks are trading at 34-40 times multiples or mid-caps are trading at 20-25 multiples against their historical average of 10-12 multiples. Though there are anomalies in a few stocks’ valuation, the aggregate market valuation is only slightly overvalued as some of the stocks, especially PSU banks, are trading at a low valuation due to NPA problems.

Where do you see the anomaly in valuation — in large- or mid-caps?

Usually mid-caps are traded at a discount of 20-25 per cent to large-caps. But now mid-cap valuation will be slightly higher than large-cap. This is because the incremental flows went into mid-cap stocks as they were doing better financially than large-cap stocks.

Many of the large-caps are cyclical in nature, including some PSU banks, which got impacted by external factors. These companies are coming out of the painful period and valuations are reasonable. There is more opportunity in large-caps now.

How do you see the GST roll-out impacting corporate earnings?

There will be a lot of confusion. GST roll-out would have caused more pain if demonetisation had not happened. After demonetisation, a lot of distributors, dealers and retailers have gone for GST registration and got the GST software in place. There will be a lot of destocking and restocking for taxation purpose.

Given the government resolve to implement GST, the willingness and preparedness has gone up among corporate houses. Corporate earnings will be hit in the June quarter as dealers and distributors have stopped taking new inventory. The impact will be more when compared quarter-on-quarter as dealers have restocked after demonetisation and again they have to go for discount sale. However, the September quarter will more than make up for the June quarter losses. GST impact will be done by end of the second quarter.

Will GST on mutual funds impact inflows?

I don’t think so. There are not many avenues for people to invest. Fixed deposit rates have fallen to 7-8 per cent and it comes down to 6 per cent if adjusted for tax. About one crore central government employees have got their Seventh Pay Commission. In the March quarter, many PSUs such as GAIL, BHEL and BEL have implemented revised pay scales. There salary has gone up by 25-30 per cent. The savings rate will go up as almost 1.5 to two crore people will get higher salary. Lot of these people have missed investing in the market earlier due to their disbelief in the market.

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