Returns from consumption stocks could be muted, says Kenneth Andrade

On the liquidity side, the consensus still favours India to be one of the faster growing economies across the world, says Andrade

As the markets now await the policies from the new government to revive growth in its upcoming Budget and corporate earnings for the first quarter of financial year 2019-20 (FY20), Kenneth Andrade, founder and chief investment officer, Old Bridge Capital Management, tells Puneet Wadhwa that the country needs fiscal consolidation before kick-starting the economy. Edited excerpts:

Do you see markets undergoing a time-wise correction now?

For the Indian markets, the biggest question is the revival of corporate earnings. While there are no immediate signs of the same, what remains buoyant is the cash flow cycle with corporate India. Except for the banks and a few financial stocks that are taking the brunt of the slowdown of the investment and consumption cycle of the last two decades, the rest of the balance-sheet is fine. Leverage is significantly off the peak. 

Till the earnings growth return to double digit, overall market capitalisation will remain capped and any move would remain gradual. On the liquidity side, the consensus still favours India to be one of the faster growing economies across the world. ‘Buying on dips’ has always worked in the Indian markets, unless we encounter an event which is correlated globally.

Do you expect the markets to correct sharply in case the corporate earnings disappoint over the next few quarters?

March 2019 quarter was quite a let-down in numbers. Overall growth was in low double-digits. A significant number of consumer businesses slowed considerably. Apart from the NBFC (non-bank finance company) slowdown, the elections also played its part in moderating this growth. Results from the other heavyweight in the index – the banks – were mixed. Most of these businesses are at the end of their NPA recognition cycle and hold promise for the year ahead. In a nut shell, while the numbers were lower-than-expected in many cases, worst in the domestic economy seem to be behind us. 2020 should see corporate banks report some strong numbers. If the rest of the corporates hold on to their current level of growth, the earnings growth next year should be in mid-double digits.

Are the risks to the market rally more from global issues rather than domestic factors?

There are all pointers to the global economy slowing down. Add the fact that every country is hiking the barriers to trade, which in fact lowers the opportunity for growth. Post the elections, this remains one of the risks to the equities.

The recent rally in the large-caps has been led by only a handful of stocks. Is that a cause for worry? 

Polarisation in stock markets is not a new phenomenon. This, however, can’t be in perpetuity. Stocks continued to outperform in absence of any revival in the economy. Valuations have been pushed higher. Overvaluation has its downside risks. I would side-step those stocks. At the other end, absence of growth in the mid-and small-cap companies has made investors wary. For this segment to do well, earnings have to come back. The mid-cap and small-cap indices have corrected – both time wise and percentage wise. While valuations would look more comfortable compared to 2017, this segment could also go sideways if growth does not emerge. 

What measures to you expect from the government over the next year?

In the ride up to every election, governments outspend themselves. 2019 has not been very different. We need fiscal consolidation before we can kick-start the economy. A lot of cleaning up needs to be done, especially with dues to corporates before the next leg of spending takes place. In the near-term, however, the government would lay out the policy framework to be executed over the next five years of its tenure.

Does the consumption-related investment theme still hold promise?

Consumption is a secular trend in India. If you leverage this trend, growth accelerates – this was the phenomenon that happened in virtually the entire of this decade. The best of growth rates, we believe, are behind us and this segment needs to consolidate; incomes have to set an upward trajectory before consumption starts all over again. Add to this the valuation worry, as of some of these businesses are close to their historical highs. If we put both the above together, returns from these stocks could be muted.

Kenneth Andrade, founder and chief investment officer, Old Bridge Capital Management