The wise men in the market always say that ‘markets are all about cycles’. In the special show ‘Investment Guide’, Kenneth Andrade, founder and CEO of Old Bridge Capital Management, demystifies the importance of understanding market cycles and their timing.
Understanding market cycles
“In the context of what happens to the underlying stock, the profitability in that segment expands quite dramatically. But when profits expand, it brings new competition and new competitive pressures that come through. So, sometimes capacities expand far faster than demand expansion."
"That to a large extent creates a top in the market cycles. So, we need to understand as to where it is and how to capture those inefficiencies in the market. In virtually all period of time, it always represents itself in valuations. So, valuations peak during that part of the market cycle,” Andrade said.
What is the next cycle?
“If you look at the metal pack, some of the companies are throwing up cash flow and profitability in one quarter, which is equivalent to the profitability of an entire consumer business. Now, this has happened after nearly a decade. So, are we looking at a new category leadership in that marketplace? Maybe this is just an indicator, but if profits hold on, and it is not a tall task for it to hold on because some commodity prices are just around their 2008-2010 prices."
"So, if profitability holds on, then I think there will be a reasonable amount of attraction for investors to slightly adjust their portfolios, if not fully adjust their portfolios.”
What are the key big themes?
“The biggest commodity that seems to be benefiting from the entire electric conversion of automobiles globally is copper and everything that is linked to that. At the other extreme, the backend, which is all the power plants that are setup across the world will also somewhere navigate themselves towards to move away from fossil fuel."
"It has already started, but this could just accelerate its way into the next 10-15 years. So, long term, the greener environment or decarbonisation as the world calls it, will be one of the biggest themes that will drive capex opportunity across the world.”For the full interview, watch the video.