A Challenging Investment Climate

There is an equal opportunity in debt as well as equities for investors who can play the market in a systematised manner, says Kenneth Andrade, CIO, IDFC Mutual Fund

What is your take on the present investment climate? 

If I were to describe the present investment climate in one word, I think all I would say is that it is challenging. The investment climate can be viewed in two parts–one, the real economy which is the corporate sector and the second is the financial investor. Corporates have not seen any increase in profitability for the kind of capital they have invested. Regulations and policy frameworks have not been of a speed which can be said to be up to the mark with the underlying investments that they have under- taken. This essentially points out to low profit growth and its subsequent result of incentivising companies to expand capacities. This has had a rub-off effect on financial investors whose portfolios have seen single digits to negative returns since 2008.

Equity or debt, what looks good right now? 

I think both are respective opportunities. When we talk about debt or fixed income it’s a double digit opportunity and it should sustain itself for some time and you do not see this period very often. Investors should position their portfolios to these opportunities on the fixed income side. Valuations on the other hand for the equities part are pretty much close to where we have seen them bottoming out historically. I think there is a lot of opportunity to buy them out. The only thing that goes out of favour is the current investment climate. But, this itself is the opportunity to buy out in the equities. Much of the money in equities is made when companies and corporate come through the cycle. So at both the ends of the spectrum, opportunities are available, but, it depends on how you want to capture them. 

What do you think is the reason for the high levels of volatility in the market now?

Volatility has been there since the financial crisis of 2008-09. I do not think that there is anything new in this. But the markets especially the index has remained in a trading band since then. There are lots of companies that have made new highs with regards to their prices and also in terms of their profitability. On the other hand, there are companies that have high debt levels, have corrected accordingly. There always exists an opportunity to create portfolios to capture these deviations. 

How do you rate the FII activity over the recent past? 

On the lighter part, this question should be answered by the FIIs as they have different mandates on different countries. But yes, as a local investor what I can say is that the investment climate is not as robust in the equities as it is for fixed income. In debt, what you see is what you get, but, in equities the environment should settle down first, before we can attract equity flows.

What is your comment on the present valuations? 

Valuations are fair and there are certain portions of the markets that are available at cheap valuations at this juncture. But, the need of the hour is for the growth to come back in the system and then only valuations will play out. 

Can you tell us three sectors in which to invest in right now? 

I will answer that differently. As a fund manager or a portfolio manager our job is to buy a company that has efficient capital and not a sector. If the return of capital employed is better than the cost of capital then that business attracts me a lot. This is demonstrated in a large build up of our portfolio. There is a significant consumer based business in our portfolio and that is something that we like at this point of time. We are fairly neutral and do not be sector over- weight or underweight. We concentrate largely on the stock picking part. 

What is your advice to retail investors?

I think investors should invest in things that they know about. There are upsides in every asset class and there are risks in every asset class too. You have to run a balanced portfolio. Between both the asset classes that we deal, i.e. equity and fixed income, what I can say is that they give you fair amount of opportunities and provide returns. Equity is a long term asset class and you have to calibrate your risk and return profile accordingly. Equities will only give you return across an asset cycle and not across an economic cycle. But, it is always better to have a fixed income part in your portfolio.