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Kenneth Andrade, head - investments at IDFC Mutual Fund spoke to Tulemino Antao on the market trends, outlook for FII flows and interest rates. Excerpts:
Markets have started consolidating after closing at all-time highs amid profit taking at higher levels. What would be the broad market trend?
It has been a tough market to call in the last couple of years. While the overall macro environment has deteriorated asset markets including equity have been holding up. Most investors have been on the sidelines given the bearish context of the underlying economy. On the other hand, except for the Nifty which is a whisker away from its all time intra-day high, the other sectoral indices have still some way to go before they close at their all time highs. So, the rally has been led by a few good companies.
While saying that India is still a challenging environment to build a business into, political environment and inflation will take a toll on near-term growth and profitability. This should keep equity markets in check in the near-term.
The good part of the environment is that most entrepreneurs and business houses have realigned their strategy in-line with the broader economy. We should see a capex freeze and deleveraging of balance sheets which is in context a good thing for profitability and cash flows.
Post the recent rate hike by the RBI, what is your call on interest rates going forward and what impact can it have on investments?
For the near-term, at least there is little visibility on interest rates reversing their current trend. While this has had its impact on the investment part of the economy, there is little effect on discretionary spends. Into the end of CY2013, auto numbers are holding up. Higher cost of capital is being subsidised by higher discounts in most categories. This is normal cyclical behavior of most consumer companies in light of higher costs.
Without wanting to comment on any specific industry, our alignment of the portfolio is to capture companies that are aggregating higher market shares in their category. In effect the high cost of doing business would weaken newer entrants and as the environment improves we expect these companies to lead the business.
What is your take on the Bank Nifty at current levels and what is your outlook on the banking sector?
While one can argue on the valuations of the banking space, our belief is that the sector has multiple challenges ahead. In the near-term, it has to deal with the deterioration of growth and bring down delinquencies.
On the other hand, a low growth environment is not conducive for growth and a high interest rate regime would put pressure on margins. This till date has played out on a couple of companies in the sector. The private sector seems to have managed the risks significantly better. But if this economic environment remains status quo this could get incrementally challenging. Banks are historically late cycle plays. They tend to do better at the fag-end of an economic cycle. We have little reason to think it would be different this time.
Your fund IDFC Premier Fund has been ranked as the top performer in the mid-cap category. Are there any interesting ideas in the mid-cap space? What would be your top picks in the mid-cap space that are fundamentally sound for an investment horizon of one – three years?
We are using this environment to build our portfolio into companies which have survived the stress of the economy. There are a lot of category leaders available at comfortable valuations. These companies are not financially leveraged. So it’s not really which stock will do well, but which company is aggregating a higher market share, which company is deleveraging and generating cash flows. I think valuations are fair in the environment; we need category leaders to build into the future of the portfolio. The portfolio of the fund is in public domain.
