Ace stock investor Anil Kumar Goel loves his early morning cuppa – with a dash of mint, some ginger and a spoon of honey to sweeten the brew. Goel does not like sugar, but the quest for higher portfolio returns has led him closer to sugar manufacturers.“Investors always get caught in fancy expensive counters during bull runs. They fail to see quality stocks that have not kept pace with broader markets,” explains Goel. He sees a lot of value in sugar companies – “especially Uttar Pradesh-based sugar manufacturers. Printing and writing paper companies also look good,” says Goel, whose stock portfolio could be worth several hundred crores.The Chennai-based investor had predicted in 2014 that “the mother of all bull runs” would start in 2016-17. Now, he is a bit worried about his prophecy coming true. Goel had based his prediction on the premise that corporate earning would grow in the years that followed. Little did he realise that it would be robust investment inflows, and not earnings , that would spur stocks to dizzying heights. Indian shares have netted the highest ever inflows in the first half of any year since 2010. Foreign portfolio investors (FPI) and domestic mutual funds (MF) have pumped over Rs 95,000 crore into Indian shares since January this year.If one takes into account investments from insurance companies, net equity inflows could easily cross Rs 1.30 lakh crore in six straight months, market experts opine. “The rally we’re seeing now is more liquidity driven. Companies are trading at expensive valuations despite tepid earnings,” says Goel. “I wouldn’t be surprised if market corrects in the coming days. But minor dips would be supported by heavy buying.”The Sensex has gained over 17% in the last six months, and tipped an intraday all-time-high of 31,757 points on Monday. The 50-share Nifty has also breached the psychological barrier of 9,700 and is now hovering at 9,771 levels. At current levels, several sectoral frontliners are trading at PE multiples (trailing price-to-earnings) in the range of 20 to 50 times.That apart, over 93% of BSE-500 companies (469 out of 500 stocks) are trading above their 200-day moving average (200-DMA), a technical indicator used to analyse price trends. High 200-DMA readings reflect investor optimism; extremely high readings are also seen as a warning the market may soon reverse to the downside.“Valuations are stretched… Nifty is trading closer to 19 times forward earnings. There are pockets of excessive valuations in the mid caps,” admits Abhay Laijawala , head of India research at Deutsche Equities. “A correction in valuations cannot be ruled out, if there’s some unexpected development. But we’re positive about India’s longer-term prospects.”A liquidity-driven stock market is not India’s sweet problem alone. World over stock indices are riding high on excess liquidity. Emerging markets such as Brazil, Indonesia, Chile, Korea and Taiwan have returned in excess of 20% since last year, beating India fair and square in the race to provide best returns to investors. A few developed markets - such as UK, US, France and Germany - have also posted 20-25% gains over the past 12 months. “Indian shares have not done anything exceptional here… they have just moved in tandem with their global peers. Such (stock) buoyancy can only be attributed to higher investment inflows,” believes A.K. Sridhar, director & CIO, IndiaFirst Life Insurance.“We’re only seeing 4-5% upside from current market levels. Markets may correct in the interim or stay in a tight range in the short term.” The tidal f low of money into equities market has benumbed several “pain points” that could otherwise have triggered a correction. Dalal Street has been unmindful of “negatives” such as lacklustre corporate earnings, bank non-performing assets, growth concerns of IT companies and the short-to medium-term effect of GST on India Inc. Indian shares weakened a wee bit in November and December last year (the demonetisation effect), but recouped most of the losses in the first few months of this year. A positive monsoon forecast, lower interest rates, a stronger rupee and stable crude prices are outweighing most negatives, reckon brokers and fund managers.Even price-conscious FPIs have not restrained themselves from buying expensive counters. India-focused overseas funds, ETFs, long-term money pools, nimble footed hedge funds and sovereign moneybags, among others, have pumped in close to Rs 56,000 crore in Indian equities since January. While most foreign investors have beefed up their portfolios buying additional shares, they have also booked profits in (or discarded) some counters.Market experts, however, do not expect “the FPI-sponsored party” on D-Street to continue long. The intent of US Federal Reserve to shrink balance sheet would significantly reduce money sloshing around in world markets, experts predict. “Global liquidity will come down in the coming months. US Fed has already decided to reduce its balance sheet by curtailing their bond-buying programme,” explains Sridhar of IndiaFirst Life. “This will jack up interest rates in the US… We may see some flight of foreign capital from emerging markets then,” he adds.One peculiar trait of this rally is that it is not entirely dependent on FPI inflows, or at least that is what savvy investors believe. Their bets are on domestic mutual funds, which have contributed significantly to appreciable gain in stock prices. Strong fund inflows, thanks to a stupendous rise in SIPs (systematic investment plans), prompted domestic MFs to pump in Rs 40,000 crore — the highest in the first six months of any year starting 2010. Average monthly inflow into equity MFs stands at around Rs8,500 crore currently.“Domestic inflows have been the main driver of market the last few months,” says PVK Mohan, head, equities, Principal Mutual Fund. “And this may not abate anytime soon, unless there’s some major catastrophe like a global meltdown or an interest rate shock back home. But both these factors do not even come in our worst-case scenarios at this point in time,” Mohan assures.Asset managers, on their part, are finding it difficult to accommodate such large sums of fund inflows. They are forced to buy stocks at outrageous valuations, as holding cash (and not buying stocks) would shrink fund NAVs in a rising market scenario. Despite that several funds are holding 12-15% cash (above their hedging requirements), in anticipation of a price correction.Mutual funds are buying auto companies, banks, consumer durables, cement manufacturers, non-ferrous metal companies and NBFCs currently. A few large funds have also reduced their exposure to software and pharmaceutical companies.“Excess liquidity has made Indian shares pricier; but then it has not helped companies with poor governance or operational matrices. Only quality companies have gone up this time,” says Nilesh Shah, MD of Kotak Mutual Fund.Most investors and market intermediaries whom ET consulted picked lacklustre corporate earnings as their main worry. Indian companies have not been able to keep pace with rising markets. Conservative investors would thus call this a “hollow market rally” or simply a “bubble.”“We’ve had three years of negligible corporate growth, but still we have an outperforming market. Now that’s a bit odd, in the sense that it has not happened before for such a long period of time,” says Mohan of Principal Mutual. “The re-rating of stocks (to higher levels) has only happened because of favourable macroeconomic conditions. Investors are now waiting for earnings to catch up. But this may only start towards FY18-19,” he adds.Steel manufacturers, power generators, banks, construction companies and telecom service providers have registered singledigit sales growth rates (1 to 8% CAGR) the last three years. None of these sectors have logged any profit (in combined terms) during the considered period. Individual businesses within these sectors are staring at a massive debt-pile, which compounds woes even further. Banks that have loaned money to these companies will have to take a payback haircut exceeding 50%. It may take a long time before these companies (and their lenders) start delivering, experts opine. “Earnings growth has been weak and may remain so in the coming quarters,” says Laijawala of Deutsche Equities. “For the current quarter, we expect Nifty earnings growth of just 4%. There is also a downside risk to broader earnings growth expectations,” he adds.At broad market level, equity-watchers are expecting a price correction or time correction in the near-term. If it is a price correction, one may not see markets dropping below 5 to 8% from current levels. A time correction could be longer - and more painful - as market would move in a tight range with stiff resistance at the top. “If market manages to cross the 9.700 hurdle, it may scale 10,000 (Nifty) over the next few months,”says Puneet Kinra, AVP -quant research at Bonanza Portfolios.Jyotivardhan Jaipuria of Veda Investment Managers has a different take on the market’s trajectory. According to him, there is a pattern emerging, wherein stock markets have performed poorly in the second half. “This has been happening for five – six years now,” Jaipuria says. “But even if you discount the pattern, now is not the right time for short-term investors to buy. People who have slightly longer investor horizon — one to two years — would make money if they invest now.”Factors such as short-term GST impact, fiscal slippages due to farm loan waivers and risks to short term earnings may apply brakes on the current rally. Analysts may also be watchful of upside risks to inflation arising out of farm loan waivers and seventh pay commission pay-outs.But conservative investors like Anil Goel do not give up their hunt for value – even in overheated markets.“You’ll still find good companies - at the right price - if you search hard. This market has ignored commodities completely. I wouldn’t be surprised if you find value there,” hints Goel.In other words, you may find a multi-bagger if you don’t follow the money. According to Shah, two investment themes should do well in the coming months: the first being ‘financial savings theme’, which could augur well for banks, broking, insurance and microfinance companies. The second theme is ‘government expenditure; so road pavers, railway suppliers, defence-related companies should perform well. Movement in IT, pharma and FMCG stocks would be more event-based, Shah opines.Apart from mutual funds, savvy high networth individuals (HNIs) have also increased allocations to equities. Prateek Pant, co-founder & head of products at Sanctum Wealth Management, affirms the trend thus: “There’s a risk-on attitude among high net worth individuals now… They’re buying mid- and small-cap stock at every given opportunity,” Pant says. “People are exiting gold and real estate investments. More money is being allocated to equities now,” says Vikas Khemani, president & CEO of Edelweiss Securities.“That apart, a lot of money has moved into banks post demonetisation. This savings pool is slowly moving to equities market now,” Khemani added.