Mumbai: The turmoil in India’s non-bank finance companies is deepening, with a troubled lender disclosing further missed debt payments late on Friday and panic seeping into what has been Asia’s best-performing stock market. The benchmark equity index had its wildest intraday move in more than four years before closing with a 0.8% loss on Friday as investors remained jittery about the nation’s financial shares after a recent default by Infrastructure Leasing & Financial Services Ltd. A measure of investor anxiety surged to its highest level in more than four months.
How IL&FS default could impact Indian stock markets
“It was gut wrenching day in Indian market,” said Jagannadham Thunuguntla, senior vice president and head of research for wealth at Centrum Broking Pvt. in Mumbai. There was a “free fall” across the market, “with almost no place to hide,” he said.
The day started with a nosedive in Yes Bank Ltd’s shares after India’s central bank rejected the lender’s request to extend the tenure of Chief Executive Officer Rana Kapoor by three years. Then came a record plunge in Dewan Housing Finance Corp., which bled into other financial stocks, on speculation that a debt default by IL&FS may spread to other lenders.
The reason for the speculation: DSP Mutual Fund sold Dewan Housing bonds at a discount last week. The fund manager sold the debt to boost its cash holdings before an expected tightening of market liquidity in September, Kalpen Parekh, president of DSP, said in an interview. The firm sold 3 billion rupees ($41.6 million) of the bonds to express “our interest view, not a credit view,” Parekh said. “This has been done across issuers over last few days.”
IL&FS missed interest payments again on Friday, it said in a filing to the stock exchange, causing concern among the myriad investors, including private individuals, who had regarded the group’s debt as rock-solid. Dewan Housing’s Chairman Kapil Wadhawan told Bloomberg that the company hadn’t defaulted on any repayments and had a cash surplus to cover any dues for the next six months.
With the IL&FS cash crunch set to intensify, there are concerns that the impact may spill over into the wider infrastructure industry, pushing up funding costs and possibly putting the brakes on some of Prime Minister Narendra Modi’s investment plans. Its outstanding debentures and commercial paper accounted for 1 percent and 2 percent, respectively, of India’s domestic corporate debt market as of March 31, according to Moody’s Investors Service.
India’s central bank and the nation’s market regulator are “closely monitoring recent developments” and are ready to take “appropriate actions,” if necessary, the regulators said in statements released simultaneously on Sunday.
“The ongoing elevated volatility is here to stay in the near term,” said Rajesh Cheruvu, chief investment officer at WGC Wealth Management Ltd. “Housing finance companies have seen the pressure due to high valuations as a segment over the past two quarters. This may spread to NBFC stocks as their valuations too are quite demanding,” he said.
Some were surprised at the selloff. “Cash markets not respecting supports was a big surprise,” Jaiganesh Balasubramaniam, market technician at Cashthechaos.com in Singapore said by phone. “Either the fall is an aberration or India will underperform EM and global markets for a month or so.”
Flight to quality
Meanwhile, some money managers are still bullish, suggesting investors move capital into quality stocks. “We are not worried about overall India,” Arthur Kwong, head of Asia Pacific equities at BNP Paribas Asset Management said by phone from Hong Kong. “It is still bullish for me. We like private sector banks.”
“Despite current stresses,” James Syme, a London-based money manager at JO Hambro Capital Management, which oversees over $40 billion in assets, is “comfortable” owning Indian stocks, particularly private sector banks. “This is more a historical problem being resolved now rather than an ongoing credit crisis in Indian corporate.”
For Isabelle Mateos y Lago, chief multi-asset strategist at BlackRock Investment Institute, her focus is on the nation’s resilience amidst the broader emerging-market selloff. Strong domestic growth and the high proportion of dollar earnings from corporate India has acted as a good hedge against dollar strength. “It’s a market that requires high selectivity particularly within the financial sector,” she said.
Still, after a world-beating advance this year, the outlook for India’s stock market might be turning amid the financial-industry turmoil. Elevated valuations, upcoming elections and a potential slowdown in economic growth, prompted Goldman Sachs Group Inc. to call time on the world-beating surge in Indian stocks in a report dated Sept. 16. The firm downgraded its stance to the equivalent of a hold rating after the S&P BSE Sensex Index climbed 13 percent as of 14 September.
“We believe the coming week will begin in some clarity,” said Jayant Manglik, president at Religare Broking Ltd. Investors should buy-the-dip and start accumulating “fundamentally sound” stocks, he said.