Top Funds See Value in Risky India Bonds After Rout

(Bloomberg) -- Two of India’s biggest money managers are turning bullish on bonds of riskier companies, lured by the value in higher yields after the central bank tightened monetary policy.

They also see corporate credit worries fading after companies took advantage of easy liquidity during the pandemic to clean up their balance sheets.

ICICI Prudential Asset Management Co., India’s second-largest money manager, is on the hunt, even as credit markets from the US to Asia show the worst signs of stress in more than two years. It sees a potential entry point to add high-yield credit as spreads widen over the next few months.

Nippon India Mutual Fund, backed by Japan’s biggest private life insurer, expects the yield gap to government bonds to increase by as much as 30 basis points, creating value for investors.

“Where the product mandate allows taking risk, there we will look at investing in structured, high-yield bonds,” Amit Tripathi, chief investment officer for fixed income at Nippon India, said in an interview, adding he’ll especially look at investing in businesses where there’s more visibility on cash flows. “The market is much more convinced about the health of corporate balance sheets, and promoter quality, and hence we see incremental risk seeking behavior.”

Buying soon could prove costly if the Reserve Bank of India continues hiking rates aggressively over an extended period, but for now it’s a positive sign for India. The riskier debt is typically sold by medium-sized firms, which help drive much of the nation’s economic output.

The signs of demand also herald a reversal of sentiment after investors shunned lower-rated corporate debt in the wake of the 2018 collapse of IL&FS Group, which triggered years of turmoil in India’s credit market.

“We are in a good credit cycle right now, and we don’t see any systemic credit challenges for our economy,” said Manish Banthia, senior fund manager for fixed income at ICICI Prudential. “From relative risk return perspective, A rated credit will become more attractive than AA, and AA rated credit will become more attractive over AAA.”

The RBI, which pumped trillions of rupees into the financial system during the pandemic, crushing the spread corporate bonds offer over sovereign debt, has increased rates by 90 basis points in two moves since May.

This has seen the gap between AAA rated corporate notes due in three years and comparable sovereign debt climb 30 basis points in three months ended June. That’s the most in five quarters and Banthia and Tripathi expect further widening.