Veteran asset manager Kenneth Andrade expects the biggest shift in the Indian stock market to be from euphoria to uncertainty as Asia's third-largest economy stares at a challenging 12 months amid rising inflation and crude oil prices.
And navigating uncertainty could be challenging for an investor. That, according to the founder and chief investment officer of Old Bridge Capital Management, is an opportunity to review portfolios.
It’s important for stocks in a portfolio to rebound after a correction, according to Andrade. “Most professional investors make a mistake of staying with legacy businesses, hoping for them to come back. Any business that demands enormous amount of money to grow, is going to be less efficient as time goes by. This effectively means that there will be reduction in return ratios. This period of uncertainty will give investors a chance to revisit their portfolios and assess what business will work and what won’t.”
The benchmark Nifty 50 Index slipped after hitting a record earlier this year, giving hardly any returns so far in 2018. The GDP growth though has rebounded from the impact of note ban and the goods and services tax and grew at 7.7 percent in the March quarter—the fastest pace among the major economies. Yet, rising crude prices threaten to hurt the government’s finances and stoke inflation, posing a risk to growth in an election year.
But Andrade is not too worried about the macros in the near term. “Micros look like they will take care of the worries of politics and macros. Banks cleaning up legacy assets, companies not having enough debt on books are all areas of comfort,” he said.
Last year, markets were trading at 20-21 times their one-year forward earnings compared with 18-19 times now. Consolidation in the markets may be a two-year process as well and presents an opportunity to structure your portfolio well, he said.
When looking to buy, he hunts for businesses which will show growth rather than focusing on dividends and buybacks. Andrade, who is also market-cap agnostic, says the starting point is to find an industry that should be able to grow and a company that improves market share every year. Such a business either has a product or a client base which is growing faster than the industry and should be cash-flow positive, he said. “Growing market share by itself is an easy thing because one can always buy market share. To do that with positive cash flows year after year is the litmus test.”
Indian pharmaceutical companies continue to face pricing pressure in the U.S., their largest market. The industry will “see some stressing out and some capacities will give up in the entire system” before reaching a phase of stability and turning around, Andrade said.
In India, there is such a large population that anything or everything can be sold, according to Andrade. “Without rural participating, however, growth can’t happen secularly. And growth in rural [economy] can happen only with the government spend.” Depending on how well investors can identify the areas of growth, he said there are opportunities offering three- to fourfold returns in a single financial year.