Morgan Stanley Gains on Best Asia Junk Debt as India Shiftsby
‘There has been a re-rating from a very weak story,’ Mar says
India junk bonds gained 25% in 2016, versus 18% for Indonesia
Morgan Stanley Investment Management says India has transformed from a “very weak story” to its best bet in emerging Asian credit.
Policy makers’ efforts to reduce risks to the nation’s credit rating and support key industries like steel and renewable energy have allowed companies to prosper, according to Warren Mar, New York-based head of emerging-market credit strategy. Indian junk notes in dollars gained 25.3 percent this year, beating the 17.7 percent for Indonesian debt, according to a Bank of America Merrill Lynch index.
“There has been a re-rating from a very weak story to one of the better stories across emerging markets,” Mar said in an interview in Singapore. He oversees about $2 billion of developing nation credit. “In Asia ex-Japan, the place where we have done well is India, Indonesia, in that order, and to a lesser extent China. It’s a reflection of our positioning and our conviction trades.”
Since Prime Minister Narendra Modi came to power in May 2014, S&P Gobal Ratings has raised its unsolicited BBB- rating outlook to stable while Moody’s Investors Service boosted its Baa3 outlook to positive. Success in improving public finances and monetary easing has encouraged money managers at BlackRock Inc. and Pacific Investment Management Co. to make India among their biggest allocations in Asia.
While Indian junk bonds have been on a tear, there have been dips in the market, most recently in June and August. Morgan Stanley has been picking up the debt when selling was overdone, including Vedanta Resources Plc and Tata Steel Ltd. notes.
Vedanta’s January 2019 notes have returned 64 percent this year and Tata Steel’s July 2024 debentures jumped 29 percent, according to Bloomberg-compiled prices. Morgan Stanley is “quite balanced” in its India allocation, Mar said, with holdings including high-grade debt of Reliance Industries Ltd., Bharti Airtel Ltd. and Adani Transmission Ltd.
The rally has cut the yield spread on India’s dollar junk bonds over Treasuries to near a two-year low of 417 basis points on Oct. 12 from as high as 1,115 in January, according to a BAML index. That compares with 687 basis points in Latin America on Oct. 12.
Goldman Sachs Group Inc. analysts said in a report on Oct. 7 that some investors it met considered Latin American credits the most attractive, and Asia’s the least. They found very little interest for China, Indonesia and India high-yield corporates.
“There is a natural tendency, after a strong rally and markets testing new lows, to ask the question, is the trade over? Mar said. “No matter the rhetoric, you have to step back and independently ask, is this reasonable given all of the things driving current valuations. For India, there’s still value and we are still overweight.”
Asia’s third-largest economy is enticing Robeco Groep NV with prospects for faster growth, which the government forecasts at as much as 7.75 percent for the year through March 2017. The promotion of Urjit Patel as Reserve Bank of India governor last month emphasizes policy continuity, according to the Dutch fund manager.
“The drivers of expected performance are largely the same: positive growth expectations which currently are almost an exception rather than the rule, and a relatively supportive reform environment,” said Maurice Meijers, who oversees Asian credit and heads Robeco’s Singapore office.
Robeco invests about one-third of its global emerging credit strategy in Asia and India is about one-fifth of the regional weight, Meijers said. While the fund generally prefers high-quality companies, “name by name, there are always positive exceptions,” he added.
As country risk subsides, Morgan Stanley’s Mar said investors can focus on companies.
“We like the renewable energy space, companies like Greenko,” he said. “We are very happy with owning Vedanta, which has been a great opportunity for us. We have also owned the steel industry, on a tactical and strategic basis, as the industry is looking a bit better.”