India's top hedge fund is exploring opportunities in state-run banks, a sector shunned by most investors till now, as valuations turn attractive and the backlog of bad loans that have riddled lenders start to dwindle.
State-run banks will also benefit if the economy continues to grow at about 7 percent, Andrew Holland, chief executive of Avendus Capital Public Markets Alternate Strategies LLP, said at the Reuters Global Investment 2019 Outlook Summit.
Bad loans at Indian banks reached a record $150 billion at the end of March with state-run banks accounting for the lion's share. But the bad debt is declining, Indian Finance Minister Arun Jaitley said in September.
"I think we're coming to the end of the cycle in terms of the bad loans," Holland said, although he added that he would only buy state-run banks for short periods, because their management remained a concern.
"I still take the view that the management of PSU banks change too quickly," Holland said. "So, you never really do a good job over a short period."
"I'll be renting rather than owning them in 2019," said Holland, who manages over $900 million in two key funds.
The state-run banking index has dropped nearly 25 percent in the past 12 months.
Holland said he turned bullish for the first time last month after being "pretty negative from the global and local perspective" for most of the year. A correction since September has made valuations "more compelling", he said.
Broader Indian markets hit a record high in August but have since plunged nearly 10 percent. Liquidity concerns at non-banking finance companies caused a credit crunch that spooked investors.
"Large cap funds have fallen from anywhere between 10 to 15 percent and it's quality stocks which have taken a beating." Holland said. "So we've got that good opportunity to start deploying more."
Holland said he would look to increase exposure to large infrastructure and capital goods companies in 2019 if the government continues to spend on development and reforms persist.
"The private capex cycle should pick up in the second half of 2019. And that's what will drive the share prices," he said.
Holland, however, said his bullish call was based on the assumption that India does not get a "messy coalition" government after national elections, set for May.
Opinion polls show Prime Minister Narendra Modi remains the front runner to win another five-year term, but his Bharatiya Janata Party has suffered reverses in recent local elections that have energised the opposition.
Before the elections, Holland said, he might move back to cash unless it is clear who is going to win, since India's elections in the past have moved markets 20 percent up or down.
But Holland said that he did not expect a new government to unwind structural policy measures such as the major tax reform introduced in 2017 and a new bankruptcy law.
"I think India will continue to grow at 7 to 7.5 percent, earnings will continue to grow at 15 to 20 percent over medium term," said Holland, who has spent more than 20 years in India. "So, I'm not overly negative on India."
First Published: IST