Investors opting to sit back till things get clearer: Kenneth Andrade

Even though the markets have recovered from their recent lows in a hope that the worst may have already played out as regards coronavirus (Covid-19) pandemic, KENNETH ANDRADE, founder & chief investment officer (CIO) at Old Bridge Capital Management tells Puneet Wadhwa that investors need to push their investment horizon to 2022 and beyond to watch how corporates recover from the lockdown. Edited excerpts:

Do you see more pain for the markets over the next three – six months once the dent on corporate earnings and economy due to Covid-19 becomes clearer?

The market sell-off has already captured a lot of bad news in the price. Businesses now trade at book value (BV) or significantly lower, which limits their downside. The risk-reward ratio is very favorably balanced in favor of the former, time is the only element one cannot quantify. At this point there is little value at looking at the immediate future, as the first half of this year remains a washout. One needs to push the investment horizon to 2022 and beyond to watch how corporates recover from the lockdown.

How is the mood among your clients / investors as regards equities as an asset class?

There is, of course, a concern given the steep correction. Some of the smaller market indices have seen lows that have gone back to 2006. In this context, feedback from investors is fairly balanced. While there is a concern at one end, but they also understand that there is low valuation risk in the system. The preference right now for new money is to sit on the sidelines till things get a bit clearer.

What is the likely dent on the economy and the corporate earnings for financial year 2020-21 (FY21)?

The first quarter of the financial year (April – June period) accounts for 15 per cent – 20 per cent of corporate India’s turnover. If the problem does get resolved and the pandemic risks ease, it will give India corporates reasonable time to gear up for the second half of the year. Earnings will fall for sure, but there is little sense in trying to predict 2021.

Do you expect the polarisation to become more entrenched now given the impact Covid-19 will have on corporate earnings and its recovery?

The availability of credit will drive polarisation of industries – and it may not be too different this time. The only change could be that polarisation could be a bit more broad-based. Earlier it was restricted to a few sectors, this time it could be multiple sectors but a few companies within them would participate.

What has been your investing strategy amid the recent sell-off? Overweight and underweight sectors?

We missed the entire rally in the financials in 2019. Today, we don’t have too many consumer businesses in our portfolio, given the valuation profile of this space. These are two segments where we will continue to be light on. Our emphasis has always been on the trend shifting from the consumer-driven economy to economic recovery. While in recent times, the former has to an extent played out, the latter part also seems to hit a stumbling block with the deterioration of the Government balance sheet. At this point energy, businesses facing the farm sector and manufacturing find favor with us.

How should investors tackle the listed stocks in the financial sector?

Financials have the most leverage to any economic growth and benefit from the fastest-growing part of the economy. And when this runs aground, the financials take it on their chin. This is what is currently happening. We may see challenges in the near-term with businesses facing the consumer. Discretionary spending may take time to return and this will affect both companies operating in the environment and financials lending into this business. For now, there are few safe havens, and most of them are priced well. While saying that, if demand remains elevated in this space for a while, the premium pricing in these stocks will be maintained. In telecom, like most other segments, consolidation should result in pricing and cash-flow.