Investors should be cautious and selective amid record highs on D-Street and the big earnings recovery which the street is waiting for could well come in 2023, says Kenneth Andrade, founder, and chief investment officer at Old Bridge Capital Management said in a D-Street Talk podcast with Moneycontrol.

Kenneth has over 30 years of experience in Indian Capital Markets, portfolio management, and investment research he has a formidable 15-year track record managing some of India's most successful equity funds.

Edited excerpts:-

Q) With both Sensex, and Nifty50 at record highs – does it make you cautious at current levels or optimistic, and why?

A) Well, we’re seeing markets at an all-time high for a number of times probably in the last two decades that I've been witnessing as a professional. And, at all periods of time, you tend to be a little cautious, and at the same time, you need to be a little selective as well.

I think that as you continue to invest in equities, there is always a return to be made from it. Yes, one should be cautious, but at the same time, investors need to be extremely selective of what they buy.

When we say selective – we mean that one needs to find businesses that will remain solid, have longevity, and companies that could hopefully migrate to the top of the industry.

I think in a market like that this is what we need to look for. Corrections will happen, but, I think that is part and parcel of investing.

Q) With economic and earnings recovery sometime away – FIIs have turned net buyers again. In fact, money is pouring from FIIs, DIIs as well as new age investors. What is fuelling FIIs optimism?

A) Excellent. The economic recovery and earnings recovery is a year away. But, even if we look at a year, which was a complete washout, and India lost almost five months because of the pandemic in terms of economic activity -- the numbers as far as earnings were concerned were not terrible.

When we go through the income statements or the profit and loss accounts, we have seen that some of them (companies) continue to curb expenditure levels.

Companies who have been able to adapt to the environment, and still show up flattish profitability after losing a significant amount of time not having any economic activity, show the resilience of the underlying businesses that they are in.

So, fast forward it’s not 2023, 2022 will be an okay sure, but fast forward is through 2023 -- I think that will be the first full year of economic recovery.

The sense that we get on the ground is that corporate India will be completely ready for that both in terms of scaling up production as costs are low, and profitability metrics will surprise a lot of investors. Q) Sectors that are likely to drive the next leg of the rally on D-Street?

A) If I take a world view, the world is opening up a little faster than the rest of India, and the economic activity has resumed.

A lot of Indian corporates are plugging the gap and fill in the supply chains that are there internationally. I think that this is a much larger and scalable market and Indian companies have got the cost to their advantage.

Two, it's an opportunity that exists because inflation across the world has made some countries reasonably uncompetitive in the larger scheme of things. There is an opportunity for India and that is the part of the market that we actually favor.

For the domestic economy, I'll be a little more cautious because the last decade has been driven by personal balance sheets, or it's been largely a consumer or a consumption-based decade.

Their income levels or income growth don't appear to be too robust. So, the growth that we've seen over the last decade will tend to taper down.

We favor export-facing businesses, companies that have the cost advantage in their favor, and two we are a little averse to buy too many domestic consumer-facing businesses.

Q) Small & midcaps continue to dominate the price action on D-Street. What is your view on the broader market space for the next year or two? Do you think the time of easy money-making is over and investors should be selective in this space?

A) I mean, money is never made easily. Because, if you have made money easily, it will go as easily also. You have to be a little careful, like I said, for the first question.

You have to be a little selective in what you and how you approach investing right now. If we look back in the last two years, 2018-2019, and some part of 2020, the mid-caps and the small caps did nothing, if at all, they were down 30% to 40%.

You’re just seeing a valuation recovery in some of them or in a lot of them. There is excesses built up in some part of the marketplace.

For a large part of the breadth of the market, you’ll just have a valuation bounce that's coming through. And from our portfolio perspective, I am seeing this valuation bounce back coming through.

My view is that if you're selective enough, then there is no problem with the mid-caps and small caps in this environment.

If at all there is a change over the last two years, the stress on these companies’ balance sheets and their profitability is much better than it was about two years back.

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