Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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The Adani saga – answers to some of the key questions for foreign investors
Charu Chanana
Chief Investment Strategist
Summary: India’s corporate governance has come back in focus with the Adani rout, alarming foreign investors who had been looking at India as a potential long-term opportunity especially with a shift away from China. While the extent of collateral damage can be contained and Modi’s popularity will be protected by a lack of coherent opposition, the key concern on how deeply the investor confidence gets dented and whether markets start to question India’s premium valuation.
The Adani saga continues to unfold, after Hindenburg Research accused the conglomerate of stock manipulation and accounting fraud. The group has lost over $50 billion in market value since, with Adani Enterprises down over 20%. If MSCI decides to reduce or remove the eight Adani group and associate stocks that are constituents of MSCI India Index, there will be potentially be more outflows to be seen. Adani’s rebuttal appeared to fall short to assuage investor concerns.
Key questions that are of relevance for a global audience include:
- the extend of collateral damage, especially the impact on Indian banks,
- whether Modi’s popularity could plunge, and
- the impact on foreign investor confidence
Collateral damage to remain contained
At least 40% of the group’s debt is exposed to Indian banks, with a substantial part with Life Insurance Corp. of India as well. Reports suggest that as much as 8% of LIC’s equity assets under management, amounting to a sum of INR 740 billion, were invested in the Adani Group of companies. This suggests that a case for collateral damage is significant.
The NSE Bank Nifty has underperformed the broader stock indices in the last 3 trading days, with public sector banks such as the State Bank of India being one of the biggest decliners. Ripple concerns on PSU banks remain the most likely given their high loan exposures to a single entity means financial stability risks in the system.
Beyond the banking sector, systemic risks may be limited as India’s demographic advantage and mass urbanization continues to underpin a positive outlook for the markets.
Modi’s popularity may take a small hit
Political risks and the questions on crony capitalism in India will also be in the limelight with the Adani fallout. But the impact on Modi’s popularity are unlikely to be substantial. The Adani Group’s rebuttal against Hindenburg invoked a nationalist response, claiming that an attack on the group was an attack on India. More importantly, the lack of a strong and united opposition in India creates limited scope for such opportunities to be exploited.
The question on whether India continues to consolidate state assets and create monopolies or move towards a free market economy to foster competition is the key one for long-term investors.
Plunge in investor confidence is the key concern
The biggest threat of the dispute will be on what impact it has on the foreign investor confidence. The sentiment has turned slightly bearish on India in general, given the risks of political influence and lack of transparency. While these risks are inherent to the Indian markets and well aware to investors, the risk-reward for the Indian markets has just taken another turn for the worse.
More importantly, as we highlighted in this video, Indian markets started the year at a significant valuation premium to other Emerging Markets. The corporate governance risks in India have been highlighted once again with the Adani report, raising questions on whether the premium that India trades at to other emerging markets is justified.
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