The current investment behaviour in the IPO market is marked by increased liquidity in the system and investors hunting for listing gains, said Joseph Thomas, head of research at Emkay Wealth Management.

In a conversation with Benzinga India, Thomas also talked about his expectations for the second quarter, investments in defence and public sector stocks and how investors’ liking for systematic investment plans was going to fare in the market. Here are edited excerpts from the conversation:

How do you view the Q2 results?

Q2 earnings may not see any re-rating and the earnings may remain muted. Some of the companies might show some increase in profitability maybe because of lower input costs.

When it comes to the bottom line and when it comes to actual earnings, it could be more or less lacklustre or muted and we may not see any re-ratings. This was the same situation in the last quarter as well. 

Which sectors look attractive now?

In the sector-wise analysis, some of the sectors which look quite good are technology, pharma and healthcare, and some select stocks in the BFSI (banking, financial services and insurance) segment. These are some of the areas that could look good in the coming days.

How do you view railway, defence and public sector utility (PSU) stocks? Some of them have corrected in the last quarter after their rally. Is it attractive now?

PSUs have a lot of potential that cannot be ruled out. They benefitted from the public capex from the Indian government. In the last one year, these stocks have risen between 90% to 100%. It is a very high return and naturally some amount of normalisation was to happen because these returns were not sustainable. But there is no reason to believe that they will not do well. 

Coming to the defence sector, there are very few companies for investments and that puts some restrictions on the extent to which one can capitalize on those opportunities. The defence manufacturing sector could expand over some time in the next five to 10 years.

Therefore, those opportunities may be quite limited but in the PSU segment as such where we have seen some corrective downward movements, it makes sense to move in and pick up or invest in that segment at this point in time.

See Also: Hindustan Unilever’s Net Profit Falls 4% To ₹2,612 Cr, Misses Estimates

How do you view the fact that the number of SIPs has reached an all-time high in September?

As far as the SIP inflows go, the inflows are quite healthy. So, our reliance on overseas investors coming in and bringing liquidity to the markets has been relegated to the background because the domestic investors themselves are putting $2-3 billion equivalent of rupee funds into the market.

So local investors have got so much money to put into the markets mainly due to the increased digitisation and financialisation that we have seen in the last one decade or so. A lot of money probably might have moved out of assets like real estate and then moved into the financial markets.

We believe that the SIP inflows into the markets will continue. If you see a major sell-off in the markets or some amount of selling in the markets, then some investors could go in and cancel some of those SIPs also. If you go by the past experience, whenever the market faced a very negative sentiment over a period of 2 or 3 months, people have revised their investment behaviour to adjust it to the changing conditions.

But at this point of time, I don’t think if the market falls by 6%, 7% or even 10%, SIP investors would move out of the markets. They might probably use it as an opportunity to invest or continue with the SIPs. So, we expect that money to come into the markets increasingly.

How do you view the IPO market? Large IPOs like Paytm have been wealth destroyers. Usually, big IPOs like Hyundai come at fag end of a bull market.

There were some anxieties about the investments in the IPO market. But one of the things which facilitates IPOs, or which would allow IPOs to do very well is the liquidity conditions in the market. If you look at the liquidity dynamics for equity markets has completely changed.

Now the fodder comes from the SIPs through the mutual funds. If you look at the other segment of the markets, the fixed-income market, there also the liquidity dynamics have changed. There is a lot of money that’s coming in mainly because of the index inclusion of government of India bonds by JP Morgan index, FTSE Russell, Bloomberg Bond Index. There is a lot of money coming in there also.

The liquidity dynamics for the market has changed. If you look at the interbank market where banks and other financial institutions borrow, there is a constant surplus to the tune of about one and a half to two lakh crore in the interbank market. That’s the liquidity available in the system.

This surplus could help markets because this surplus will keep the money market yield lower and that would also facilitate investments. I do not think these IPOs are coming up because there is a frenzy. As you see each and every IPO is being listed at some amount of premium though varying in degrees.

People, especially retail investors — even institutional investors — are encouraged to participate in the IPO market. So, the liquidity conditions support the IPO market because the liquidity dynamics has changed.

Second is that the prospects of capitalising on some kind of capital gains at the shortest period of time is also leading to some kind of frenzied behaviour by which people are bidding on IPOs and then encashing it quickly. 

So, I don’t think these are indications that the market is going to correct heavily or correct too much. But it is the product of liquidity and also perceptions of individual investors as also institutional investors about the future trajectory of markets.

Read Next: Always On Lookout For Synergetic Acquistions, See Strong Growth Potentional In Insurance Segment, Says BLS E-Services’ COO