India has given the world strong franchise in a wide spectrum of industries, with among the best corporate governance standards, says Kenneth Andrade, Founder, Old Bridge Capital
A planned hike in US interest rates in 2023 has investors around the world worried already, but according to Kenneth Andrade, founder & chief investment officer of Old Bridge Capital Management Pvt. Ltd if the global economy sees a return to normal from the pandemic, a rate hike will have moderate impact. He bets on FY23 as the year of full earnings growth; however, a slower recovery, another wave of covid, inflation, deficits are key risks that may derail Indian markets rally, he said. Edited excerpts from an interview:
Fed has indicated at least two rate hikes by the end of 2023; how will it impact markets like India?
There has always been a correlation of equity valuations with interest rates; so, in the normal process, asset market should get impacted if rates rise. But all of this will have a moderate impact if the global economy sees a return to normalization from the pandemic. In India also, it will be no different. An economy has its own strengths and weaknesses, capital flows remain democratic and in the near term they will behave in a synchronous manner.
Do you think foreign institutional investors (FII) inflows to India will taper down gradually?
We are really no experts on global flows. However, there are allocators out there that have long-term commitments to India, and the number of these funds keep rising every year. Short-term inflows will get impacted in the near term, but long-term capital will continue to feed this economy.
When rate normalization starts globally, what will be its impact on India’s valuations?
Even if valuations do get impacted, our focus as managers and investors should be on which set of companies will significantly improve profitability. This is the best way to protect and grow capital. So, if the question you asked were to play out, we would just need to learn to manage this better through portfolio allocations.
India versus emerging markets-Do Indian equities stand out? What are the grounds?
I am not sure statistically we stand out in this current environment. But the long-term structure of the Indian economy will always be relevant. Competitive manufacturing and a service economy that feeds into the world supply chain is always an investment option, when the domestic environment is under stress. And when domestic demand returns, we have 20% of the world population with rising per capita GDP (currently this number is struggling). So, between the two, you can always make an investment case for India. And, India has given the world some very strong franchise in a wide spectrum of industries, with among the best corporate governance standards. Over periods of time, something has always played out.
Do you think following US Fed and other central banks including RBI, may start tightening rates sooner than anticipated? How will this impact equities and debt markets?
We have never had an opinion on how central banks work. But as I mentioned at the beginning of this conversation, yields are always correlated. If they move up, valuations of all assets will get impacted.
Which risks may derail the rally in Indian markets now?
We can think of many – a slower recovery, another wave of covid, inflation, deficits. Near-term, the risk of rising crude oil prices.
If the super-cycle in commodities continues in the rest of this year, will earnings for India Inc be downgraded?
Why would they? It’s just a transfer of profit from one part of the economy to another. Commodity manufacturers will gain at the expense of others. Some level of inflation is always good for new capex. And while prices do look like they have run away, a few have made historical highs.
When do you expect a full recovery of earnings in India?
FY21 over 2020, Nifty profitability was flat. Depending on when we get back to full capacity and demand, by all metrics for now, FY23 does look like the year of growth.
What are some of the long-term opportunities among the emerging markets, including India?
The answer is pretty simple. India ranks as the 5th largest in absolute GDP and 145th in per capita income, India per capita GDP is $2,200 per annum. The convergence of these numbers, rise in per capita income, is the promise we hold out. This by far is the longest term opportunity, if we can find the formula for the same. The same applies to any emerging market – the factors that contribute to this in individual countries will at the most be different.
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