Interest rates key for equities but investors must crave opportunities in every crisis: Kenneth Andrade

Kenneth Andrade, founder director of Old Bridge Capital Management Image: Mexy Xavier

As Kenneth Andrade, founder director of Old Bridge Capital Management, expects the stock market in India to consolidate in 2024, he feels that a lot of investor sentiment is dependent on global interest rates.   

However, the investment manager who manages an AUM (assets under management) of Rs 8,000 crore in India feels that every crisis, like the unprecedented pandemic or the two wars in 2023, should be utilised as opportunities to scout for good business at a reasonable valuation.   

“If you go back into history, and if you look at every event that came through, especially with Covid, and in 2008, the global financial crisis, you felt very negative. But something like that doesn't last perpetually and if you didn't capture that opportunity of this ‘kitchen sinking’ at that point in time, you would not have made money,” he tells Forbes India.   

He adds that for a retail investor, the stock markets may appear like a minefield but one will have to navigate those to create a risk averse portfolio and make money.

Edited excepts from an interview:  

Q. As you said, there are a few sectors that you don't want to touch. I am curious to know, which are these sectors?
That is the secret sauce. I think the broad characteristic is, if you look at it this way, if you came out of 2000 and thought IT had bottomed out because prices have declined, you were right, they did bounce back. But then, the bear market went on or the consolidation went on to 2008-09 before they started to climb again.   

The same thing happened in infrastructure. In 2008, infrastructure was very buoyant, but then, after a point of time, we built everything too fast, then there was no demand. That went on a side-ways consolidation cycle. Then we have the consumer cycle when inflation was approaching.   

So, if you were there in these three periods of time, and you just say, ‘oh, you did these three sectors’. The end result of the portfolio would have been significantly large, because IT went to on to become almost 50 percent of the index. Think about a sector at 50 percent and you are owning the other part. That's how structurally markets evolve.   

For us, buying stocks and segments of the market while keeping the others away is a very core part of our entire thought process going forward. Our point of view has been, if the world is rebuilding its entire economy back again or taking supply chains and there are disruptions in trade cycles, there are incremental amounts of challenges that are there. Like does the world have enough of materials to supply into that infrastructure cycle. And if we don't, then we are probably heading towards something called inflation.   

If inflation is high, then obviously the consumption economy is not going to do very well.

And if the consumption economy is not doing well, we are very circumspect by buying consumption as a theme.   

Q. So, currently are we in that environment?
That’s what, I would basically think, the environment is shaping to be.   

Q. Cost of capital in 2023 was quite high due to steep interest rates all over the world.
However, now expectation is that inflation is around RBI’s target and consumption is going to increase because of government’s election-led spending. How do you see these themes when you are building your portfolio?
It is too short-term. What happened in the last cycle? Markets went up in 2014, then nothing happened till 2018-19. That has nothing to do with the elections at all. The entire global spectrum is about interest rates. Are interest rates in the US higher than what they were at the start of 2023? At 4.5 percent rates, they are no way close to 100 basis points to what they used to be.  

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Q. Generally, the macro-environment situation in India is that during election time, government spending lifts, at least, the lower category income consumption?
It is too small. Those are not sustainable trends. It is a one-time pop and then it goes.

If you get a one-time cash flow, because of all these, you can't give it multiples.   

 Q. What is your overall view on consumption, with a divergent trend between the luxury segment and low-ticket size products?
Stay out of it.  

Q. What about equities? In 2023, two unprecedented events hit markets just after the pandemic. How do you keep yourself risk averse?
If you go back into history, and if you look at every event that came through, especially with Covid, and in 2008, the global financial crisis, you felt very negative. But something like doesn't last perpetually and if you didn't capture that opportunity of this ‘kitchen sinking’ at that point in time, you would not have made money.  

I went through that cycle, and through the 2000 cycle. The thing was, what will you do when Covid hit you? So when markets go down, they don’t stay down. But when they go down, what's in investors’ favour? If you are getting businesses, valuations, absolute hardcore commodities at prices you have never seen before. Every industry crisis, there is an opportunity to actually go down that path and see where it is. There I can take a short-term call on what will happen. You can't find the bottom, of course, when you buy it, it will still fall 20 percent. But then that 20 percent virtually comes and it goes.   

The longer time you spend in the market, more you understand that every risk, or every event, is an opportunity.   

Q. That definitely is true for a seasoned and experienced investor like you. What about a retail investor who hasn’t seen these many cycles in the markets? Doesn’t it increase the risk for a retail investor? How should he/she evaluate the markets risk?
These are minefields that all investors will go through and they will have to navigate them. From a mutual fund perspective, it's very simple. You keep doing it consistently, and you will come out on top. For being consistent, one has to go for a systematic investment plan (SIP).   

Even if you are investing in an IPO consistently at the top of the cycle, then you will come out fine. So in SIP, it is not essentially about just equity mutual fund. You can do it across any field and still come out on top because you catch the lows and you catch the highs.

And both happen together. So if you're making 50 percent a year, you are not going to make that again. To expect that, it's good, but I don't think it's possible over multiple periods of time.  

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Q. What is your general view on the gush of IPOs and the kind of companies going public? Would you consider having an IPO-focussed fund?
So how do I define my business? I define my business as buying capital efficiency at a price. If the IPO market is trading at a premium to whatever is there, in the secondary market, why should I go to the IPO market? If there is an arbitrage in the secondary market, I don’t need to go to IPOs to buy these stocks.   

Q. Overall, where do you see Indian markets in 2024?
The markets have to consolidate. I am a little wary about what's happening in the microcaps space. It is not probably the best thing that will happen in investor interest over medium-term periods.   

Q. Lastly, how do you respond to this fact that most of the gush of SIP money into MFs is led by pure play fintech companies?  Do you think that there is a tough competition out there, especially for new entrants?
It's a new distribution that emerged and frankly, the markets are going electronically. So, the legacy businesses had distribution bases across the country with offices all around the country. The new generation businesses may not follow the same path. They will rely largely on technology and that works.  If I can use UPI to do a transaction, why do I need to go to a bank? Why should the bank open a branch? If the bank doesn't need to put up a branch, why should a mutual fund open a branch? The legacy companies will adapt.