'Valuations stretched, time or price correction likely'

Some of the best-managed banks in India are trading at lower valuations vis à vis their long-term averages even as their fundamentals remain strong, says AJAY TYAGI, head of equities at UTI AMC. In an interview with Abhishek Kumar in Mumbai, Tyagi says private banks, consumer services and consumer discretionary look attractive for investments even when the market has turned expensive across most of the segments. Edited excerpts:

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The market surprised most analysts in 2023 with a sharp rally. Is there scope for the momentum to continue in 2024?

It looks unlikely. In terms of valuations, we are significantly above the long-term averages as far as mid and small-caps are concerned. Relatively speaking, large-caps are better but even there, the room for valuation upside is limited. They are trading 15-20 percent higher than their long-term averages. Logically, a time correction should follow or even a price correction. The future course of the market will be determined by valuation de-rating and earnings growth.

With the rate cut hopes building up in the US, there's an expectation of strong overseas inflows. The domestic flows have been strengthening each month. How big a support is that for the market?

The cause of strong flows is basically a strong market, as evident from the flows last year. The smallcap and midcap funds have garnered most of the flows because they have done exceedingly well. Will flows remain strong if markets turn sideways or correct? At least, history tells us that's not the case. For us, fundamentals dictate the stock selection.