Pressure rises at IMF on the way to rework emerging mkts’ debt ‘Stock market is mirroring real activity in Indian economy’
INTERVIEW
World financial leaders are pushing to overhaul a system for sovereign debt restructurings that has left poor countries locked out of capital markets as China’s emergence as a key player upends traditional negotiations.
How to fix the so-called common framework initiative, hatched during the pandemic to help poor countries rework their debt, was among the top issues debated during International Monetary Fund’s spring meetings, which just wrapped in Washington DC.
Leaders from the IMF and G-20 countries—which started and oversee the process—have made some fixes aimed at speeding up debt restructurings, which have left countries stranded in default for years amid protracted negotiations. Zambia, considered a “guinea pig” for the new model, only recently struck a deal with creditors, three and a half years after it defaulted.
Ghana and Ethiopia, which stopped paying bondholders in late 2022 and 2023, are still negotiating.
“The last four years have been nothing short of a debt disaster,” said UN SecretaryGeneral Antonio Guterres. He railed against the system’s perceived ineffectiveness, citing the example of Zambia. “This is more than counter-productive.
This is immoral. This is wrong. This must change.”
While defaults are expected to subside and risk premium for high yield countries has plunged, emerging-market governments—excluding China—face an estimated $421 billion in debt payments this year. That, combined with the risk aversion roiling markets amid tensions in the Middle East and the Federal Reserve’s higher-for-longer stance, is adding to the urgency to find a fix. “Ultimately, the ones paying the real price of prolongated default periods are the people of these countries,” said Joe Delvaux, a money manager in London at Amundi SA.
Debt reworking has always been a complicated business that involves deals with the IMF, foreign Treasuries and private investors. Commercial banks and foreign governments organized into the London Club and Paris Club of creditors to streamline negotiations
The stock markets are reflecting the rising heft of small and mid-sized companies as the benefits of 7.0-7.5% annual GDP growth percolate to them. That’s why the market construct has changed—the Nifty 50 companies which accounted for 80% of the total market cap 15 years ago have seen their share drop to 50-55%, especially after the pandemic. That share has been taken up by the market cap of the rest of the companies rising, says A. Balasubramanian, MD & CEO, Aditya Birla Sun Life AMC. Edited excerpts:
Are there any more regulatory concerns around the small- and micro-cap segments?
The intention of regulation is to create checks and balances in the market where there is a significant rise, driven either by flows or by a huge participation coming from high networth individuals (HNIs) and retail. Some elements of checks and balances need to be created. Secondly, they (participants) also ignore any investment that is being made at obnoxious valuations and so on. Therefore, the intervention that came was more intended towards this end.
It’s not just today. Historically I’ve seen that regulatory intervention helps stabilize the market.
How is the sentiment now?
The buoyancy continues to remain high, and that optimism and buoyancy is coming on the back of expected GDP growth being close to about 7.5-8.0%. I often say that all cylinders are firing in the Indian economy, which is driven by broadening of economic growth across India. That’s why we see the market construct having changed from high concentration coming from Nifty 50 companies about 15 years back in the overall dominance of market cap from 80% to around 50-55% now. That decrease has been taken up by the market cap of the rest of the companies (mid-cap and smallcap) rising, particularly, over the past four years.
So they all have gone up on merit, purely on the base of earnings growth and on the base of revival of fortune.
Are you saying that high valuations are justified?
Whether you like it or not , the market is reflecting the real activity that is happening in the Indian economy across all segments of economic growth. The government’s focus is on building public infrastructure. Now that’s not just restricted to roads. It actually is covering multiple segments of the economy, including railways, so the whole ecosystem will get the benefit. In the ecosystem are many small companies who have been playing a role in making India. But they did not get recognized in the past. Now they are.
So could the real concern of the regulator have been for froth in the SME segment?
In every market, you’ll always find some abnormal movements. Like the SME issues getting priced very aggressively. In a smaller issue size, people also participate big time and we see huge oversubscription coming from a smaller issue size. Generally, this is a sign of euphoria. But that euphoria is only in a certain segment of the market. There has been euphoria in the SME segment, which is visible in oversubscription in retail investor portions. Is such euphoria present in pockets of small- and midcaps?
I think the fundamentally sound companies don’t have any problem. There are genuinely sound companies in the small- and mid-cap space— both from a business model
I often say that all cylinders are firing in the Indian economy, driven by broadening economic growth A. Balasubramanian MD & CEO, Aditya Birla Sun Life AMC
point of view as well as from future growth point. And third is because of the way the balance sheets construct has happened, because they have been large beneficiaries of low interest rates and of the spending that comes from both the private and public sector. Like, the automobile ancillary companies have been large beneficiaries of the significant investment that has gone into the EV (electric vehicle) making.
Do you see this lowering our imported energy bill? Exactly! When the oil price goes above $100 a barrel are we in a position of heavy dependence only on oil? Or do you have enough alternatives to overcome the oil price pressure that could come and hit the economy and still continue to pursue the growth path?
I think the way I see it is despite the oil price going up this time around, the impact of that, in general, on the broader economic growth should not cause a shock as it has in the past. That’s courtesy of the whole alternate energy system improving quite significantly.
But, this will take time to come on stream, given the size of our country…
Even if it takes time, as long as there is a direction, that’s what the market and the world is looking at. In my view, the direction India is moving in, is clearly one towards making India achieve new milestones across the economic spectrum. Towards becoming the third-largest economy.
That’s the first big component. The second is saving forex through such initiatives.
The number of items which get imported in the country now has actually reduced and local production has started. Like, if EV manufacturing happens in India then I don’t need to import electric cars.
These initiatives will converge and if you look at them from buoyancy point of view for the small- and mid-cap space, that will remain from the India point of view.
So, this outperformance of and flows into smalls and mids will continue?
I think we’ll see a shift. If you look at 2014 to 2018 there was a complete mid-cap rally and then after the IL&FS crisis, when there was uncertainty in the broader economy, we saw a significant dip in small-cap and mid-caps.
Wherever significant overvaluation happens, the market gives room for them (the segment) to do a time correction. So we don’t see a fall, but we see the time corrections, as seen in many company stocks, and we will probably have to be prepared for that in the small and mids.
If you come to the large-cap and, say, nominal GDP growth is 12.0-12.5% that limits earnings growth for large caps, to the benefit of smalls and mids, isn’t it?
The breadth in the economy is improving. Therefore, more companies are able to participate in economic growth. The smaller size companies generally enjoy a higher rate of growth than the larger ones.
But ultimately, the market rewards size.
Earnings cycle is underway. What’s your feeling?
The earnings cycle is going to be mixed, but more in favour of marginal positive than being bad. Most sectors, like capital goods, autos and public sector undertakings (PSUs) should report good numbers. Banking will also report good numbers but we might see slight pressure on margins. Pharma will see improvement and consumer durable players will see a pick up in volumes (AC sales and home appliances) because of a significant pick up in realty sector. We continue to maintain 14-15% growth for large cap and 20-22% for Smids for the next two years (FY26). Initial corporate results of some of the leading companies and their guidance are a little better than analyst estimates which should keep the buoyancy in the market intact