Q&A: Where Lombard Odier finds value in Indian credit

Covering global debt markets for over a decade, Dhiraj Bajaj highlights the biggest risks and opportunities in India and explains how Asian and emerging markets debt are decoupling.

While Indian stocks have rallied strongly this year and he rupee has been on an uptick, local bonds have been under pressure amid concerns over rising inflation and increased public spending. In the dollar bond market, November's failure by mobile operator Reliance Communications to pay the coupon on its 2020 bonds raised the alarm among overseas investors.

What's more, a mountain of bad debt has dragged on the government's ability to kick-start a stalling economy. In late October, the government of Prime Minister Narendra Modi injected $32 billion into the country's ailing state-owned banks in an attempt to clear up lingering concerns about the health of the banking system.

Still, Indian issuers have found favourable conditions in the offshore dollar market thanks to global investors' hunger for yield. Indian bond issuers have raised $32.2 billion so far this year, up from $27.7 billion the full year of 2016, Dealogic data shows.

Among those attempting to find alpha in this landscape is Dhiraj Bajaj, a Singapore-based fund manager at Lombard Odier, specialising in Asia-Pacific debt markets. He has worked at bond house Cairn Capital and on JP Morgan’s European credit and rates research desk. Speaking to FinanceAsia about the various investment opportunities in India, Bajaj touches on his biggest bets of the year, the policy outlook before India goes to the polls again in 2019, and how Asian debt could soon be classed differently to emerging markets debt.

Q: As a fixed-income investor, where’s the value in Indian credit after Moody’s upgraded the sovereign rating by one notch?

A: We continue to like quasi-sovereign US dollar corporate high-grade bonds with intermediate duration in India. They offer solid long-term fundamentals, balance sheets are well managed, bonds benefit from strong change-of-control clauses, and [the] supply of new bonds remain limited. [The] management are professional and they do not engage in large-scale M&A or expansions [that] are heavily debt-funded. That’s great for credit investors.

Q: How do you assess the asset quality in the country’s banking sector? Are the Indian banks in clear?

A: We prefer the quasi-sovereign US dollar corporate bonds rather than the public sector or bank debt out of India. This is based on better fundamentals on the standalone basis of the corporates versus the banks, and better spread valuations.

Q: What’s the policy outlook for next year ahead of the 2019 general election? 

A: After two big policy exercises that have affected the mass market over the past 18 months, demonetisation and the introduction of general sales tax, we think the government will provide a lot less surprises in 2018 ahead of the 2019 general election.

Bajaj expects fewer
surprises in 2018

Q: What has been your biggest bet in India and in Asian credit markets this year?

A: We continue to participate in the secular trends that India has to offer via the bond market – infrastructure build out, renewable energy generation, requirement for basic materials. To this effect we have been long higher quality private sector corporate issuers such as Tata Steel, Vedanta, and renewable energy producers in the high-yield segment. Within the high-grade spectrum, we think quasi-sovereigns in the oil and gas space offer value for fixed-income investor, given their very strong bottom-up fundamentals versus private sector, high-grade credit globally

Q: The Reserve Bank of India has warned about the risk of rising inflation and [left its interest] rates unchanged for the second consecutive time. How do you assess the latest RBI decision?

A: We think that is fair; monetary policy need not be easier than what it is now.

Q: What are the risks that the market doesn’t pay enough attention to when investing in India?

A: We think in the fixed income credit universe the main risk is idiosyncratic risk from bond structures and management inability to deliver on business plans within the high-yield private sector universe. Here we have seen defaults over the last few years but we do note that there are lesser, weak-quality firms [that] are able to tap the offshore US dollar market for funding. The RBI restricts private sector firms [from issuing]  bonds in offshore US dollar markets beyond certain funding costs, which limits [the] weaker quality firms [coming] to the market. This, over time, results in lower default rates [from] Indian high-yield [bonds] in [the] US dollar market.

Q: At the start of 2017, the Indian rupee was expected to be one of the [strongest Asian currencies], yet its poor performance over the last three months has brought into question that view. Why the currency  has not followed the rally in credit markets after the sovereign upgrade by Moody’s?

A: The economic reform and low commodity prices especially oil price has lifted India’s (could be current account of fiscal; think this is the latter as it relates to public spending.) deficit since 2014. However, whilst the deficit is lower, it is still negative. India has large public expenditure requirements and that isn’t going away anytime soon. The market got way too excited about economic growth but that doesn’t mean rupee will achieve runaway strength.

Q: What’s your take on India’s ability to ban the use of high-value notes while maintaining GDP growth rates?

A: We think with time, we will look back and realise that the whole exercise was rather pointless from an anti-corruption drive perspective. It doesn’t have much impact on trend growth for the country, but where it could have achieved an impact is in how [future] elections are facilitated in India.

Q: How attractive is emerging markets debt as we look to next year?

A: It is a diverse asset class but overall we expect stable credit trends. The differentiating factor [between] Asian debt vs emerging debt ex-Asia is strong fiscal balances, growth outlooks with contained inflation, beneficiaries of low commodity prices, and low political risks.

Asian debt is going through a golden age and has decoupled away from the rest of emerging market debt. We have seen Brazil, Russia, Turkey, [and] South Africa all get downgraded from investment grade to junk between 2014 and 2017. On the contrary, emerging Asian economies such as India and Indonesia has achieved rating upgrades and are firmly in the higher grade category. We are in the midst of this great, long-term decoupling within emerging debt and the sheer size of Asian credit markets will mean it will not be classified as emerging markets for much longer.

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