Finding value challenging in this “Goldilocks period”, Kenneth Andrade shares his

 While keeping an optimistic outlook on the current economic environment, Kenneth Andrade, Founder & CIO of Old Bridge Mutual Fund believes the Indian economy is experiencing a “Goldilocks period,” characterised by ideal conditions for growth and profitability. However, he thinks investors may align with growth businesses due to the scarcity of undervalued opportunities in the market.
 
His views came when the benchmark BSE Sensex scaled an all-time high mark of 80,898.3 on July 16, 2024. On the other hand, more than 10% of shares in the stock market are trading with a price-to-earnings ratio (P/E) of over 100 times.
 
Andrade, in the report, said that the corporate capacity utilisation is nearing 90%, suggesting healthy profitability growth for the current financial year. The economic environment is described as robust, indicating a favourable period for both the economy and corporate profitability.
 
“The current economic environment is robust, with corporate capacity utilisation nearing 90%. This high utilisation rate suggests that corporate profitability growth will be healthy this financial year. We see a “Goldilocks period” for the economy and corporate profitability but notes that finding value in the market is challenging due to high valuations. Investors should align with growth businesses rather than seeking undervalued opportunities, which are scarce,” the report said.
 
Despite this, the report notes that high valuations make it challenging to find undervalued opportunities. It emphasises the importance of sticking with existing portfolio holdings, given the difficulty in finding new, struggling industries to invest in.
 
The report advocates for patience, anticipating that opportunities to buy at comfortable valuations will emerge within the next year or two. The focus remains on monitoring troubled sectors for potential investment when valuations become attractive.
 
The private capex cycle is strong, with various industries, including infrastructure, pharmaceuticals, chemicals, and automotive actively investing in new capacities. The report highlights significant momentum in infrastructure, driven by government spending as well as robustness in pharmaceuticals and chemicals. It also notes substantial capex in the power sector, linked to infrastructure.
 
Regarding sector insights, the report views the entire value chain of the infrastructure sector, from developers to commodity suppliers, as highly profitable. It notes improved performance and manageable working capital cycles for companies involved in government projects. Contractors and commodities are identified as key areas within the infrastructure sector with potential for further gains. The IT sector is seeing renewed interest due to its relative valuation comfort compared to other sectors. Despite recent underperformance, large IT companies have a robust pipeline of orders that could drive growth in the near future. The sector’s revival is attributed to its valuation attractiveness and potential for order execution in the coming years.
 
Andrade is cautious about the chemical sector, particularly agrochemicals, suggesting it may take another year for the cycle to bottom out. It informs a wait-and-watch approach, with the possibility of moderated returns rather than the significant gains seen in previous cycles. The focus is on businesses with stable fundamentals, even if the broader sector remains challenging.
 
The report believes the real estate sector is in the early stages of topping out. Companies are raising capital to buy new land banks, which could temper sales due to rising prices. It mentions that while the sector has already performed well, the best gains may be behind it, and the leverage cycle in some companies could begin in about a year.