We are heading towards the end of economic cycle

The country is almost well through the mid-cycle of an economic upturn that started in 2002-03, says Kenneth Andrade, head-investments at IDFC Mutual Fund. Throughout the cycle, India continued to grow at 7-8%; but now as leverage increases and cash flows turn negative for India Inc, he says, the markets are heading towards an end of the very large economic rally that started in 2002. In an interview with FE’s Chirag Madia, Andrade says he expects rate tightening in developed economies to be a major risk for Indian markets, so is a higher oil price.

We have seen markets entering into a volatile zone after touching a new high of 21k

I think this is a year-end phenomena, as it has been a long time since money managers have taken money off the table. A fair number of investors has done some profit booking as markets have touched a new high. But the underlying fact remains that markets this year have been driven by the liquidity present in the system. Going forward, we still have liquidity prevailing in the system and India, being part of that entire emerging market basket, will get a fair share of its money.

How would QE2 measures by the Fed impact Indian markets?

Globally, money is moving in large measures into emerging markets and India is a part of that basket. So the question is not whether India will get money or would China and Latin America. All asset markets are bound to do well due to the increased liquidity in the system.

The second quarter results season is almost over, what is your take on the quarter earnings?

The second quarter results, so far, have been in line with market expectations. But then the interest rates are rising and a lot of businesses require huge capital to grow, which is not very good for the system. Also, there has been a dramatic increase in the number of companies that are cash flow negative today. So, whereas EPS (earnings per share) is positive, cash flows are negative.

Which sectors are you currently overweight or underweight on?

Broadly, we have participated in the rally. And the overall portfolio theme has been domestic consumption-driven, while we also had some exposure in the infrastructure sector. The other sector that has done reasonably well is Financials and in recent times it has come under little stress. Over the medium term, we aren’t changing the above portfolio strategy. So, while we expect Financials to do well in the large-cap space and in the small and mid-cap space, we would be looking at the consumer sector to grow, going forward.

Where is the equity market headed?

From an economic perspective, we are almost well through the mid-cycle of our economic upturn that started in 2002-03. Throughout the cycle, we continued to grow at 7-8%; so we didn’t really see any major economic downturn while the financial crisis roiled the rest of the markets. But now as leverage increases and cash flows turn negative, we are heading towards an end of the very large economic rally that started in 2002.

While volatility is intrinsic to any stock market and it will be not very different from the past, over the next one year we can expect a double-digit return, but it will not be a high number.

What are the key risks to watch out for in the coming months?

The primary risk remains that if (interest) rates starts tightening in the West, we might look at money moving back from India to dollar-based assets, which is basically a liquidity risk.

In terms of economy risk, there are challenges of running a large current account deficit that is not sustainable and which is currently funded by strong foreign portfolio inflows. Apart from that, surging oil prices are also one of the risks to the entire economic growth story.

Indian markets are witnessing huge foreign inflows. Do you think it will continue, going forward?

We have been one of the countries where a disproportionate amount of money has come in. We can't guess that this flows will continue, going forward, but India will certainly continue to get fresh money.

Over the long-term, mid-cap and small-cap indices have outperformed the large-cap indices. Do you think it will continue in the near term?

This is a part of the generic theme that is happening; incrementally a lot of portfolios are getting focused on the internal economic situation rather than the global environment. So when we look at portfolios which are focused on internal themes like domestic consumption, a lot of stock picks tend to be from smaller companies, which is why we have seen a predominant surge in mid-cap and small-caps.

What’s your advice to retail investors?

I think the financial year 2001-12 will be quite challenging for investors as they need to concentrate on the fact that they have to lower their return expectations. I think there is enough on the table to be taken away and in any market there is an opportunity and we need to look for it. Even as the market were falling there was a opportunity, so we have to look for it.

Source: http://www.financialexpress.com/news/we-are-heading-towards-the-end-of-economic-cycle/714235/0