Indian financial sector rout: concerns for now

A debt crisis at a conglomerate sparked the decline in Indian financial names, but contagion risk seems unlikely. 

Sep 27, 2018 | Invesco Asian Investment Team

The Event

  • The MSCI India index and the financial sector have declined by 7.9% and 14.4% respectively in US-dollar terms since the beginning of September. The fall was triggered by the recent developments of Infrastructure Leasing & Financial Services Ltd (IL&FS), market concern over liquidity, and unfavorable global backdrop including rising crude oil price and depreciating EM currencies. 
     
  • IL&FS, an unlisted infrastructure lender, has failed to meet a series of repayment obligations in recent days and its credit rating was downgraded by ICRA Ltd, the Indian unit of Moody’s Investors Service. The situation was further worsened by liquidity concerns in the marketplace that some financial companies might face difficulties in obtaining funding. 
     
  • Global macro backdrop has turned less sanguine for India in recent months too. The rupee has depreciated at a faster pace as a result of the strengthening US dollar, and fears over contagion risk from other emerging markets including Turkey and Argentina. The climbing oil price is another rising concern, as major producers have decided to hold back additional rise in output.

What we think

The IL&FS event

  • We believe what has happened to IL&FS is a standalone case. We don’t see that this will lead to contagion risk to the broad financial sector. We believe the key would be regulatory actions responding to the situation to ensure ample liquidity. Indeed, we have seen regulators including the Reserve Bank of India (RBI), the Securities and Exchange Board of India (Sebi) and the Ministry of Finance have all stated that they are closely monitoring the situation and ready to step up actions. The RBI has also called for a meeting with shareholders of IL&FS, to be held on September 28, on potential capital infusion plans. We expect investor confidence to gradually return should there be resolution over the issue.
     
  • We will closely follow the upcoming earnings season (starting from second week of October). We currently don’t see any factors leading to material impact on earnings of quality financial institutions. We believe the situation now resembles the aftermath of demonetization in 2016, where investor interests in financial stocks were initially lukewarm post the event but started to recover once they were sure that earnings were heading towards the right direction.

Portfolio positioning

  • We have solid understanding over the business fundamentals of our holdings. We will closely follow the development of the IL&FS event. We will also monitor macro conditions, and constantly re-examine our portfolio positioning.  
     
  • Our holdings have no material direct/indirect associations with IL&FS, and are all companies with quality growth that can reap further gains from positive reforms in financial inclusion, financialization of savings, rising digitalization among others. We will continue to closely monitor their earnings in the coming months.
     
  • Meanwhile, we have been increasing our exposures to exporters, especially those IT servicing companies with reasonable valuation and robust business models. We believe they will benefit from depreciating rupee and strengthening US economy.

Market Outlook

  • On the macro front, we believe India is in a much better position nowadays than it was in 2013 (similar external environment to present), judging by a broad spectrum of financial sustainability indicators including FX reserve adequacy, current account deficit as % of GDP, inflation, and real interest rate. The magnitude of rupee’s depreciation was also noticeably less severe that it was in 2013. We believe the RBI has ample policy tools to put up multiple lines of defense to guard the value of rupee should external pressure continues to mount. We don’t see the trade tension as a major risk for India given its domestically focused economy. 
     
  • Real GDP growth accelerated to 8.2% yoy in 1QFY19, hitting a nine-quarter high and showing a broad base improvement in demand conditions. Looking ahead, we expect the domestic economy to continue to gather strength, supported by strong consumption, particularly in the rural areas on the back of a third year of decent monsoon. We also believe the earnings story has finally made a comeback thanks to improving domestic conditions and its growth will remain robust going forward.
     
  • We anticipate news flows on general election in 2019 will generate headline risks and warrant continued monitoring.

 

 

Related articles

Important information

This document has been prepared only for those persons to whom Invesco has provided it for informational purposes only. This document is not an offering of a financial product and is not intended for and should not be distributed to retail clients who are resident in jurisdiction where its distribution is not authorized or is unlawful. Circulation, disclosure, or dissemination of all or any part of this document to any person without the consent of Invesco is prohibited.

This document may contain statements that are not purely historical in nature but are "forward-looking statements", which are based on certain assumptions of future events. Forward-looking statements are based on information available on the date hereof, and Invesco does not assume any duty to update any forward-looking statement. Actual events may differ from those assumed. There can be no assurance that forward-looking statements, including any projected returns, will materialize or that actual market conditions and/or performance results will not be materially different or worse than those presented.

The information in this document has been prepared without taking into account any investor’s investment objectives, financial situation or particular needs. Before acting on the information the investor should consider its appropriateness having regard to their investment objectives, financial situation and needs.

You should note that this information:
•    may contain references to amounts which are not in local currencies;
•    may contain financial information which is not prepared in accordance with the laws or practices of your country of residence;
•    may not address risks associated with investment in foreign currency denominated investments; and
•    does not address local tax issues.

All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. Investment involves risk. Please review all financial material carefully before investing. The opinions expressed are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

The distribution and offering of this document in certain jurisdictions may be restricted by law. Persons into whose possession this marketing material may come are required to inform themselves about and to comply with any relevant restrictions. This does not constitute an offer or solicitation by anyone in any jurisdiction in which such an offer is not authorised or to any person to whom it is unlawful to make such an offer or solicitation.