FII flows into India may take a hit in short-term: Kenneth Andrade

As equity markets digest the US Federal Reserve’s sudden shift in policy stance, KENNETH ANDRADE, Founder & Chief Investment Officer at Old Bridge Capital Management tells Nikita Vashisht that capital flows in the near-term will be in sync with global trends. Edited excerpts:

How concerned should the markets and investors be regarding the impact of the recent US Fed meeting outcome? Do you see a gradual correction over the next few months as a result?

There has always been a correlation of equity valuations with interest rates, so in the normal process, asset markets should get impacted if rates rise. But all of this will have a moderate impact if the global economy sees a return to normalisation from the pandemic. In India also, it will be no different. While we remain an economy, which has its own strengths and weaknesses, capital flows remain democratic and in the near term they will behave in a synchronous manner. Even if valuations do get impacted, our focus as managers and investors should be on which set of companies will significantly improve profitability.

Retail investors continue to throng primary markets to make a 'quick buck'. Do you expect this IPO frenzy to continue in FY22 as well?

We have had a number of bouts of capital raising whenever valuations are favourable. The only discomforting part is there is nothing on the table for investors in terms of valuations. So, it will be a long haul for new investors in a new business with limited historical record. Will it continue, as long as it is favourable for entrepreneurs to raise capital at great valuations, this trend is unlikely to stop.

Is the pent-up demand or 'revenge buying' will be enough to start a sustainable consumption cycle? Which specific sectors appeal to you within the broad consumption theme?

There will be a blip in the consumption cycle for sure. All the international data points to the direction of a revival of spending. Commenting on the sustainability of the same needs a lot more positivity on the job data front. We are a bit apprehensive that this could turn out to be a fairly weak, long-term cycle for broad-based consumers. If, at all, the pockets of opportunities are urban centric consumption, this could be the start of the longer-term trend of spending in tier1 cities and metros.

What should be the ideal portfolio allocation right now? Is it time to up allocation of 'growth stocks' as the economy starts to recover?

There is never a perfect answer for this. It all depends on your risk appetite and the style of investing you want to allocate your capital. We are always wary about what we pay for a large part of the businesses we own.  

Should investors start including cyclicals in their portfolio? What has been your strategy since the past year?

A diversified portfolio always helps in capturing the breadth of the market. If you go back into history, there is a time and place for every industry and well-run company to demonstrate performance. In our style of investing, if a lot of these names have valuation on their side and in a consolidated industry, we do allocate a sizable part of our portfolio monies to these stocks. In short, yes we do have a reasonable exposure to cyclical business that have not done too much for the last decade.

How are FIIs looking at the Indian economy now? Do you see the pace of flows slow over the next few quarters as they assess the impact of the second Covid wave?

We are really no experts on global flows. However, there are allocators out there that have long term commitments to India, and the number of these funds is rising every year. Short term inflows will get impacted in the near term, but long-term capital will continue to feed this economy.

What are your expectations from Q1FY22 earnings? Which sectors should investors keep an eye on?

Virtually, all companies will have a sequentially lower performance, but because of a very low base in the previous year – performance would look better. Just keep a watch out for the cost sheet, that’s the indication of the health of corporate India. If all goes well, the second half of the year would be a more relevant measure of performance.