Default Roils Investors in Best-Performing Asia Stock Market

By Abhishek Vishnoi and Santanu Chakraborty | September 28, 2018

India’s benchmark equity index fell the most since March, as turmoil in nonbank finance companies deepened after a troubled lender disclosed further missed debt payments late on Friday and panic seeped into Asia’s best-performing stock market.

The S&P BSE Sensex declined 1.5 percent at close in Mumbai, its fifth day of losses, with a gauge of financial shares tumbling 3.5 percent. Investors remained jittery about financial firms after a recent default by Infrastructure Leasing & Financial Services Ltd. A gauge of investor anxiety surged to its highest level in more than seven months, after the Sensex on Friday had its wildest intraday move in more than four years.

Financiers have come under pressure because “liquidity is getting tight,” Rahul Chadha, chief investment officer at Mirae Asset Global Investments, told Bloomberg TV. Markets may remain range-bound for six to nine months, he said.

Equities declined even as Indian authorities vowed to support financial markets. Indiabulls Housing Finance dropped 7.6 percent, while PNB Housing Finance Ltd. and Edelweiss Financial Services Ltd. slumped at least 8 percent. Citing recent share-price slumps and liquidity support, Kotak Institutional Equities upgraded nonbanking financiers under its coverage, including Cholamandalam Investment and Finance Co. and LIC Housing Finance Ltd.

Finance Minister Arun Jaitley said the government will take all measures to ensure adequate liquidity for nonbanking finance firms, while the nation’s central bank and market regulator on Sunday said they are “closely monitoring recent developments” and are ready to take “appropriate actions,” if necessary.

Friday was a “gut-wrenching day in the 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.

That day started with a nosedive in Yes Bank Ltd.’s shares after the 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. Dewan rose as much as 25 percent on Monday after the company said on Friday that it has 197 billion rupees of liquidity available to meet its obligations.

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 levels 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 the last few days.”

Dewan’s Chairman Kapil Wadhawan told Bloomberg that the company had not defaulted on any repayments, and that it had a cash surplus to cover any dues for the next six months.

IL&FS missed interest payments again on Friday, causing concern among investors who had regarded the group’s debt as rock-solid. 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. Its outstanding debentures and commercial paper accounted for 1 percent and 2 percent, respectively, of India’s corporate debt market as of March 31, according to Moody’s Investors Service.

“The ongoing elevated volatility is here to stay in the near term,” said Rajesh Cheruvu, chief investment officer at WGC Wealth. “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.

The S&P BSE Finance Index, which includes mortgage lenders, trades at an estimated price-to-earnings ratio of 19.3, higher than its five-year average of 17.8, according to data compiled by Bloomberg.

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 India’s resilience amidst the broader emerging-market selloff. Strong local growth and the high proportion of dollar earnings from corporate India have acted as a good hedge against dollar strength. “It’s a market that requires high selectivity,” she said, ” particularly within the financial sector.”

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 Indian stocks in a Sept. 16 report. The firm downgraded its stance to the equivalent of a “hold” rating after the Sensex climbed 13 percent from Jan. 1 through Sept. 14.

“We believe the coming week will bring in some clarity,” said Jayant Manglik, president at Religare Broking Ltd. Investors should buy the dip and start accumulating “fundamentally sound” stocks, he said.

Bloomberg’s Alexandra Stratton, Aline Oyamada, Ben Bartenstein, Yvonne Man and Rishaad Salamat contributed to this report.

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