Even though markets have recovered from their recent lows in the hope that the worst has already happened with the coronavirus pandemic (Covid-19), KENNETH ANDRADE, founder and chief investment officer (CIO) at Old Bridge Capital Management says Puneet Wadhwa that investors have to push their investment horizon until 2022 and beyond to see how companies are recovering from the lockdown. Edited extracts:
Do you see more pain for the markets in the next three to six months once the decline in corporate profits and the economy from Covid-19 becomes clearer?
The market liquidation has already captured a lot of bad news in the price. Companies are now trading at book value (BV) or significantly lower, which limits their decline. The risk-return ratio is very favorably balanced in favor of the first, time is the only element that cannot be quantified. At this point, there is little value in considering the immediate future, since the first half of this year remains a washout. The investment horizon has to be pushed back to 2022 and beyond to see how companies are recovering from the foreclosure.
How is the mood among your clients / investors regarding stocks as an asset class?
There is, of course, a concern given the strong correction. Some of the smallest stock indexes have recorded lows that date back to 2006. In this context, investor comments are fairly balanced. Although there is concern at one end, they also understand that the risk of assessment is low in the system. The current preference for new money is to sit on the sidelines until things get a little clearer.
What is the likely economic and corporate gap for the 2020-21 fiscal year (FY21)?
The first quarter of the fiscal year (April to June) represents 15 to 20% of the turnover of Indian companies. If the problem is resolved and the risks of a pandemic diminish, this will give Indian companies a reasonable time to prepare for the second half. Earnings will certainly drop, but it makes little sense to try to predict 2021.
Do you think polarization will become more entrenched now given the impact that Covid-19 will have on corporate profits and its recovery?
The availability of credit will polarize industries – and it may not be too different this time. The only change could be that the polarization could be a little wider. Previously, it was limited to a few sectors, this time it could be several sectors, but some companies within them would participate.
What was your investment strategy in the recent downturn? Overweighted and underweighted sectors?
We missed the whole rally of financial data in 2019. Today, we do not have too many consumer businesses in our portfolio, given the valuation profile of this space. These are two segments on which we will continue to be informed. We have always emphasized the tendency to move from the consumer economy to the economic recovery. While in recent times the former has been played to a certain extent, the latter also seems to strike a stumbling block with the deterioration of the government’s balance sheet. At this stage of energy, companies in the agricultural and manufacturing sector find favor with us.
How should investors approach listed stocks in the financial sector?
Financial services have the greatest leverage effect on any economic growth and benefit from the fastest growing part of the economy. And when it fails, the financiers take it on the chin. This is what is happening now. We can see short-term challenges with businesses facing the consumer. Discretionary spending may take a long time to return, which will affect both businesses operating in the environment and financial loans to that business. Right now, there are few shelters, and most of them are inexpensive. While saying that, if demand remains high in this space for a while, the premium price of these shares will be maintained. In telecoms, like most other segments, consolidation should translate into pricing and cash flow.