Overvaluation a key risk in market, says Kenneth Andrade of Old Bridge Capital; lists 6 key trends of 2023

Kenneth Andrade, Founder & CIO of Old Bridge Capital Management, anticipates a potential market downturn in the coming year.

According to the expert, macro events could be the catalyst for such a decline, with factors such as a global crisis, a country's balance sheet implosion, or a drying up of liquidity in the market being potential triggers.

Andrade suggests that a significant macroeconomic event has the potential to remove liquidity from the market. However, he also expresses a degree of optimism, saying even if that happens the market can bounce back given the back-test experience.

Back-testing involves analysing the performance of a strategy or investment based on historical data to assess how it might have performed in the past.

Read here: 5 essential steps to conclude a year-end evaluation of your financial portfolio

He further noted that based on the available data, bankruptcies and insolvency may not be immediate concerns. Instead, he identifies valuation risk as a key factor that could remain for 'extremely long periods of time like seen before'.

In 2023, the Indian market achieved historic milestones despite confronting significant challenges, including the Russia-Ukraine war, the Israel-Hamas war, peak global inflation, rising crude prices, and a consumption slowdown.

The Nifty surpassed 21,000 for the first time, and the BSE Sensex exceeded 71,000 levels, both marking an 18% gain in CY23YTD. Notably, the Nifty Midcap index and Smallcap index outperformed, showing gains of approximately 43% and 52%, respectively, during the same period. This exceptional performance underscores the market's resilience in the face of diverse global and economic uncertainties.

Read here: Nifty 50 up 18% year-to-date; what should be your equity strategy?

The market expert has listed some key trends from 2023. Let's take a look:

1) Mutual Fund Industry and Domestic Investors: Record high collections in the mutual fund industry reflect robust domestic investor participation. This indicates a strong faith in the market among local investors.

2) Primary Market Activity and Foreign Institutional Investors (FIIs): Vibrancy in the primary market and increased interest from foreign institutional investors indicate growing confidence in the Indian market from both domestic and international players.

3) Market Cap to GDP Ratio and Potential Overvaluation: The Market Cap to GDP ratio reaching potentially overvalued levels signals caution. This could be an indicator that the market has priced itself well ahead of its actual performance.

Read here: 5 tips to handle your portfolio in a bull run

4) Investor Preferences: There is a disparity in investor preferences, with domestic investors favoring smaller names and international investors leaning towards larger and indexed weights. Meanwhile, mega caps are gaining traction as valuations align in their favor.

5) Financials of Corporate India: The current state of the financials of corporate India paints a positive picture. Corporate balance sheets are at an all-time low in leverage, providing companies with opportunities to invest in growth using their strong cash flows. Stability in macroeconomic and political factors, along with government capital expenditure, supports a conducive environment for business.

6) Global Rebalancing of Trades: The prospect of a global rebalancing of trades bodes well for India, creating a favorable environment for the country to secure an expanded global market share across diverse industries. This shift presents a range of opportunities, notably emphasizing India's substantial manufacturing capabilities and the robust services industry, both of which stand out for their global competitiveness.

Read here: Navigating risks and opportunities in mid and small-cap stocks: Expert insights

Caution for 2024

Kenneth noted that there are areas of caution, particularly in the small and microcap space where excesses raise concerns. Anticipation of volatility is noted, especially in segments with seemingly stiff valuations.

He also pointed out that despite short-term challenges and potential overvaluation concerns, the overarching trend seems to favor India, presenting a higher growth potential relative to peer countries in the region. The resilience displayed by corporate India and strategic opportunities in both manufacturing and services sectors are highlighted as encouraging factors despite the need for caution in certain segments.

In summary, the Indian equity market in 2023 is characterised by growth, confidence from both domestic and international investors, and positive indicators in corporate financials. However, Kenneth advised caution due to potential overvaluation in certain segments. Overall, the long-term outlook remains positive, driven by the resilience of corporate India and strategic opportunities in key sectors.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decision.