Sectors you are bullish on and the rationale for each
If I look into what happened in FY2022, and FY2023, a couple of things that have effectively been are: one, the Indian market did extremely well compared to all the global peers. From an allocation point of view, everything that didn’t do well in 2020 and 2021 actually bounced back in FY 2023. So, from a valuation standpoint, we like the commodity basket. I think that the valuations are very fair. By commodity basket, I mean agro processors, some metal businesses (steel) and some of the chemical complexes. Some of them, not all of them. Valuations are very fair.
We’re comfortable with the real estate market. The momentum in the real estate market is good. The sector is consolidated. It’s got pricing power, and valuations based on operating cash flows is very reasonable. A large part of real estate has just reached its previous peak of 2013-14 in terms of sales.
We also like export-facing businesses. They have been in a bear market for an extremely long period of time. These businesses are fairly robust and Indian companies have a chance of going out and getting incremental amount of market share.
The last one we like is IT Services. It’s had a difficult 2022 . A very large part of the business is trading close to over 5 per cent of dividend yields. These valuations almost indicate that these companies are now good to go. That’s where we think our opportunity subset lies.
Sectors you are bearish on and the rationale for each
There’s a reason why we think consumer sector will face some trouble. Make no mistake about it, inflation will be back. We’ve seen subdued inflation levels because Europe demand is down quite significantly as they are in the winter season and multiple other reasons and China’s coming off an extreme low in terms of growth and valuation of its businesses . So, come March, April and May, I think we will have the word inflation back on the table and that’s not very good for consumer and consumer-facing businesses. That’s something that we have sidestepped for a while.
Second, there are some parts of the digital businesses that, in the absence of cash flows, will continue to remain pricey. So, we are not present in these two spaces.
Is there any positive catalyst over the next year or so?
I think we’ve come out very unscathed from the turmoil that is there across the world. Inflation in the West has actually caught up with inflation in the developing markets.
It will be good if interest rates and the cost of capital in developing markets remain competitive vis-a-vis where they are it is in the developed markets.
What about any negative catalysts?
Equities will get priced lower if the cost of debt continues to keep rising or inflation continues to eat into pricing. In that scenario, markets have to readjust to a low price earning multiple. This is simply because interest rates then may not go back to their previous lows. In the last decade or so, markets have traded close to 20-27 times earnings, and that number has to shift downwards. This will reset expectations for the decade.
Kenneth Andrade, Founder & CIO, Old Bridge Capital, has over 27 years of experience in the Indian capital markets, portfolio management, and investment research