Fund Managers Talk | There are no value opportunities in the current market environment: Kenneth Andrade

Edited excerpts from a chat:

Investors who have made enough money in the ongoing bull run are now confused whether they should continue with their SIPs or withdraw a considerable portion of their portfolio. What would be your suggestion?

SIPs are a disciplined way of averaging across market levels. They have been a wonderful tool to smooth out returns over the long-term cyclicality of both the market and portfolios.

What appears to be going off track at the moment is the trajectory of valuations and the growth of the economy. At many companies, valuations are running ahead of expectations and expectations are rising significantly. In situations like this, what is not accounted for in this scenario is an external event that could derail executions. Investors should weigh this perspective before taking any stance on incremental investments.

The above question can be answered by asset allocation. There are risks, but if you have not invested enough, there is no point in withdrawing capital; in any case, you could take advantage of any downward volatility to invest. However, if the overall asset allocation has increased in favour of equities, a rebalancing of the same may make sense.

As investors, valuation is key in determining who gets into a new company or business. We agree that valuations tend to be at the high end of their band and there is a likelihood of a temporary or price correction, but we need to have a mindset on how we should use these corrections to allocate or reallocate capital. What cannot be taken away from an economy like India is its huge scale and demographic structure, if used well, can create very valuable companies. As for corrections themselves, given the structure of corporate balance sheets, which are at an all-time low in terms of leverage and debt, very deep sell-offs are unlikely. Valuations may not rise, but if the environment remains conducive for corporate profitability, they may remain elevated.

What international investors do have is a choice: if they want a value market, several Western countries and China offer an opportunity. Growth is present in a few select regions; we are one of them. But for this there is a price to pay.

The current market is phenomenally dynamic. The valuation takes into account several years of growth. Our portfolios are currently reducing exposure to some of these names.

In the recent past, our preference has been to allocate funds to companies or businesses that are globally competitive, have completed their investment cycle and are now increasing their market share, either by industry or at the company level. More and more companies with dollar revenues are finding a place in the portfolio.

We believe that if India is to move from 3.5% of global GDP to 5-7%, it cannot do so with the same inward-looking companies that have performed well in recent years. We are not pessimistic about the opportunity these companies offer; we simply think they are more than adequately priced for the opportunity.

Would you agree that PSU railway stocks are a dynamic bet in the short term, but costly to hold in the long term?

I wouldn’t know how to comment on the individual opportunities, but from an investment perspective, we like the comfort of valuations more than trying to capture future growth.

The sector has performed well in the short term, and the reason is also due to the order book that several players have built up over the past two years. While it remains a mature sector, we do not expect the industry to have significantly differentiated returns. For all the reasons mentioned above, large-cap IT services could be one of the best sectors to take refuge in when new ideas are lacking.

Can you explain what makes you think that the real estate sector is in the early stages of its boom? Typically, the real estate sector follows an eight- to ten-year cycle.

Stocks have performed well in this sector and so far it has been driven by volumes. This time around, which is the next cycle, property prices can be expected to perform well. Consolidation, cash flows and a buoyant demand environment have helped the sector perform well.

We tend to get a little apprehensive when all players in an industry are doing well, and that seems to be happening here. Profitability and easy access to investor cash is usually a leading indicator of competition. From here, we would only see an increase in competitive activity, so we believe we are in the early stages of the cycle that is reaching its peak. Even though we say this, this cycle could last a long time; we would not be able to predict the peak.

I wouldn’t actually go looking for value in a market that doesn’t have it. We’ve been in that situation for some time now. As active managers, we need to look to 2030, so we can look at some likely opportunities that would be part of the portfolio. But I would never say that there are value opportunities in the current market environment.