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BlackRock, JO Hambro Unfazed by Indian Shadow-Banking Debt Woes

(Bloomberg) -- Debt problems at one of India’s key non-banking financial firms has failed to shake the confidence of BlackRock Investment Institute and JO Hambro Capital Management in the world’s fastest-growing major economy.

Infrastructure Leasing & Financial Services Ltd., a Mumbai-based conglomerate that funds projects across India, has missed payments on more than five of its obligations since August. Concerns that the slow payments could spread to other shadow banks in India roiled the nation’s stocks on Friday. The company is seeking to raise more than 300 billion rupees ($4.2 billion) selling assets to cut debt, according to an internal memo seen by Bloomberg.

Here’s what investors said about the impact IL&FS’s troubles would have on India’s markets:

Isabelle Mateos y Lago, chief multi-asset strategist at BlackRock Investment Institute, the asset manager’s think tank in New York:

  • "It’s useful to keep in mind that for the majority of the year, India has been extremely resilient amidst the broader EM sell off"
  • "The fundamentals remain strong: domestic growth is strong, company sentiment is high and a high proportion of dollar earnings has acted as a good hedge against dollar strength
  • There was no single clear catalyst for last week’s selloff, but a combination of “idiosyncratic bad news in the financial sector,” concerns surrounding asset quality and fears building that Indian Prime Minister Narendra Modi’s path in next year’s election may not be as straightforward as previously thought

"Our outlook basically remains positive, even if turning a little less so lately given emerging value elsewhere," she said. "It’s a market that requires high selectivity particularly within the financial sector"

James Syme, a London-based money manager at JO Hambro Capital Management, which oversaw about $40.7 billion as of end-June:

  • India is one of the four emerging markets he’s overweight on
  • “India is a market that has the potential to show very strong economic growth over the next few years. If you view the credit cycle, it should be highly positive to domestic stocks which we think goes a long way toward offsetting some of the steep valuations there”
  • “It’s a market we feel comfortable to own because despite current stresses about legacy of previous credit, overall private sector credit to GDP is basically flat. We see India as somewhat in a position to have a period of credit growth -- that would come from private sector corporate rather than government or household. We’re in this position where external financing for most emerging markets remains stressed, we think within that India is an attractive opportunity”
  • “The concern from the market has been about how fast it can grow from here. This is more the resolution of historic problems rather than a reflection on the state of corporate India today. We see corporate India in terms of earnings growth and cash flow doing quite well, so this is more a historical problem being resolved now rather than an ongoing credit crisis in Indian corporate”
  • “In the non-bank financial space, the valuations were at a level where it was easy for these stocks to fall a long way. We are exposed to the private-sector banks. By choice we don’t own any of the non-bank financials”

Rajesh Cheruvu, head of investment strategy at Sanctum Wealth Management Pvt. in Mumbai, which has $1 billion of assets:

  • “Equity market volatility is going to rise further. So the panic may spread to non-banking finance companies too. Investors have not much appetite for housing finance companies due to high valuations”
  • “Some IL&FS bonds are coming up for repayment over the next 10 days. Market is nervous over those papers. Matters could become messy if there are more corporate rating downgrades”
  • “Overall equity markets have rallied up a lot and valuations are not comfortable. Except the U.S. and India, all other markets have corrected. India hasn’t corrected as much. Some investors are taking money off the table as they sense volatility to accentuate”
  • “We are asking investors to be cautious and stick to quality names. In our bond portfolio, we are advising investors to take shorter duration”

Jagannadham Thunuguntla, senior vice president and head of research for wealth at Centrum Broking Pvt in Mumbai:

  • “The macro meltdown in terms of relentless rupee weak weakness and bond yield hardening has finally shown-up its impact in full vigor on the market”
  • “In bond yield hardening and liquidity drying scenario, the first segment that will come under pressure would be NBFCs in general and housing financing companies, in particular”
  • “In the current scenario where there are very few places to hide. Investors should focus on export-oriented sectors and zero-debt companies”

Jayant Manglik, president, Religare Broking Ltd.:

  • “We usually see such volatile moves prior to the market bottom or top but it’s too early to confirm the same”
  • “Traders should restrict leveraged positions in the meanwhile and prefer only hedged trades. Investors, on the other hand, can start accumulating fundamentally sound counters on dips with medium-to-long-term view”

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