Higher valuations the only spoiler for equities this year: Kenneth Andrade

The market is headed for an eventful 2024, and is expected to throw up positive results for equities, says Kenneth Andrade, Chief Investment Officer, Old Bridge Asset Management, a new entrant to the Rs 50 trillion mutual fund industry. In an email interview with Abhishek Kumar, Andrade says apart from valuations, the risks could emerge on the geopolitical front. Edited excerpts:

What will be the key drivers for the equity market in 2024? Do you see any headwinds emerging?

It is going to be an eventful 2024, given that a lot of countries, including India, are heading for polls. Policy continuity is key to normalcy and hence, even if there is a change in guard in some major economies, we expect a status quo. In the run-up to elections, incumbent governments tend to take populist measures, which could lead to moderation in interest rates in 2024. This is the positive side of what can transpire in 2024. On the other hand, higher valuation remains the only spoiler for equities as an asset class. In current times, we have hit a cycle where equity valuations should trade lower than what they have traded over the last 20 years. The other headwind could emerge on the geopolitical front.

Going by your strategy of identifying opportunities by looking at the industry cycle, which sectors seem attractive?

Compared to the last five years, chemicals as an industry has moved into a downturn. Commodities (mostly metals and some agricultural commodities) are also not doing very well. There are a few other sectors in a similar state. We look out for industries that are in such phases – as long as balance sheets are solvent, and the industry is consolidating.

With the US Federal Reserve rate-cut hopes building up, do you see foreign portfolio investor flows coming back in a big way?

Most of our conversation with foreign investors is focused on the valuations of the Indian market. While as a country we have held through all the volatility across the world, buying at any price is not what they are comfortable with. In that sense, FPI investment may take a longer time to come back into the Indian market.

Which sectors will benefit the most from easing of rates in India? Will it be negative for any sector?

Companies linked to government spending will benefit the most. A decline in interest rates creates scope for companies to leverage up for growth. However, we think this not going to be significantly material as corporate India is already a cash surplus.

Why did you choose a focused fund as your first offering?

The structure of focused equity funds best fits our investing style, where we try to focus on segments that could lead to the next leg of the market cycle. We build portfolios of under-30 companies that meet the criteria of capital efficiency, low leverage, and low valuation. This is a style and format with which I have been managing money ever since I started as a portfolio manager.

What is your earnings growth expectation for FY24 and FY25? Will it be enough to sustain current valuations?

The current market is factoring a mid-teen growth from corporate India in FY 2024 and low-teens in FY 2025. Of course, valuations are already factoring in the future corporate performance. If execution disappoints, there could be a near-term challenge and we could see an elongated consolidation cycle.