BackIndia’s dollar bonds find place on ‘buy’ list of investment banks
Indian dollar-denominated bonds are set for the best quarter in a year as the country's external finances improve
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Singapore/Mumbai: Indian dollar-denominated bonds are set for the best quarter in a year and Morgan Stanley recommends buying the notes as the country’s external finances improve.
“The current-account deficit shrank to the smallest since at least 2010 as the world’s biggest bullion-consuming nation curbed gold imports," while Reserve Bank of India (RBI) governor Raghuram Rajan’s swap windows boosted foreign reserves and stabilized the rupee. Morgan Stanley and Holinger Asset Management AG predict this will lure investors, even as the US pares its record monetary stimulus.
“The tapering won’t have a fundamental impact on India’s external balance," Daniel Gonzenbach, who helps oversee $4.5 billion of emerging-market assets as a portfolio manager at Holinger in Zurich, said in a 19 December telephone interview. “So Indian assets being preferred won’t be out of place in 2014."
Indian notes returned 2.7% since 30 September, the best performance among Asia’s 10 biggest dollar-debt markets, according to indexes compiled by JPMorgan Chase and Co. Chinese debt gained 2.2% while Philippine notes advanced 1.9% and South Korean securities rose 0.9% in the period.
Morgan Stanley raised its Indian debt recommendation to an equal weighting with benchmarks from underweight on 11 December, citing the stronger balance of payments. UBS AG last month recommended short-dated dollar bonds of banks over their shares among its top 10 cross-asset trades in emerging markets.
‘Stable exchange rate’
“Holinger bought a net $109 million of Indian dollar bonds this quarter and expects a more stable exchange rate environment," Gozenbach said.
The 5.4% note due February 2022 of Reliance Industries Ltd, owner of the world’s largest refining complex, rose 2% this quarter, as its yield premium over Treasuries narrowed to 263.8 basis points, the least since July, data compiled by Bloomberg show. Bharti Airtel Ltd’s 5.125% note maturing in March 2023 returned 3.4% while its spread tightened 66.7 basis points to 332.4.
State Bank of India’s 4.125% note due August 2017 gained 2.1% in the same period, the data show. Its spread relative to Treasuries fell to 65 basis points to 274.7.
The rupee has surged 11% from a record low of 68.845 per dollar on 28 August, the best gain among 24 emerging-market currencies tracked by Bloomberg. It rose as the RBI’s offer of concessional swaps for dollars raised by banks attracted $34 billion, double Morgan Stanley’s $15 billion estimate. The rally pared its decline in 2013 to 11.4%.
Deficit narrows
India’s current-account deficit was $5.2 billion in the quarter ended 30 September, the lowest in official data going back to June 2010. The gap will narrow to around $56 billion in the year through March 2014 from a record $88 billion the previous 12 months, RBI governor Rajan predicted 13 November.
Indian notes, issued mostly by state-controlled banks and enterprises, offered an average 334 basis points more than Treasury yields on 19 December, compared with 333 on 2 January and 414 on 28 August amid concerns the Federal Reserve would cut stimulus.
“This has been a year where every asset that was sensitive to the prospect of higher US rates has underperformed, and that means spreads are now wider than they were at the start of the year," Viktor Hjort, a Hong Kong-based managing director in Morgan Stanley’s research team, said in a 17 December e-mail interview. Indian spreads are also sensitive to the balance of payments, which has improved. Credit valuations do not justify us being underweight in Indian credit, he wrote.
Hjort said that an upgrade to overweight would require better asset quality of banks or an improved fiscal outlook.
Societe Generale
Societe Generale SA would look to buy short-tenor Indian bonds while avoiding those maturing in more than seven years amid uncertainty about the impact of the Fed’s tapering. The US central bank said 18 December it will cut its monthly bond purchases to $75 billion in January from $85 billion amid an improved outlook for the American job market. The Fed may taper its buying by about $10 billion per gathering, chairman Ben S. Bernanke said at a press conference in Washington.
“I would avoid longer-dated issues since I worry about how a continued steepening in the US curve will sap demand," Guy Stear, Societe Generale’s Hong Hong-based head of Asia Pacific research, said in a 19 December e-mail interview. “Under a rising spread environment, which is what I expect next year, high beta, long-dated Indian credit may underperform."
India’s economy will grow 5% this fiscal year, the RBI predicts, matching the previous period’s pace that was the slowest since 2003. The yield on the 10-year benchmark bond fell 11 basis points, or 0.11 percentage point, to 8.80% last week.
Sergey Dergachev, a senior portfolio manager at Union Investment Privatfonds GmbH bought dollar bonds of Reliance Industries Ltd and HDFC Bank Ltd.
“I plan to increase my exposure to Indian credit, but I am looking for some new issues to come as this is the cheapest and most liquid way to get exposure," Frankfurt-based Dergachev said in a 19 December e-mail interview. “I have strong confidence that the new central bank governor’s reforms are going in the right direction for the nation’s credit." Bloomberg
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