Howard Marks’ Oaktree Capital Sees Bargains In India But...

One of the world’s biggest distressed-debt investors sees opportunity in emerging markets like China and India even as the novel coronavirus pandemic threatens to plunge economies into a recession.

Distressed debt and equities are looking attractive in various parts of the emerging market basket, including India, Oaktree Capital Management’s three senior asset managers said in a roundtable with Howard Marks, the co-chairman of the alternative investment management firm that has a $19.4-billion portfolio linked to distressed debt worldwide.

The virus outbreak has already infected more than 7 lakh worldwide and killed over 34,000. It has stalled global trade and equity benchmarks tumbled more than a third in India before recovering some losses as large economies started announcing stimulus. And the International Monetary Fund has already declared a recession.

Covid-19, however, won’t remain a threat for the Chinese and Indian economies a year down the line, according to Oaktree Capital. For Indian stocks, the liquidity issues at non-bank lenders and lack of an adequate fiscal push could be bigger concerns, they said.

Here are Oaktree Capital’s views on emerging market debt, distressed debt and equities, including India.

The size of opportunities due to the $1.7-trillion distressed and stressed debt in China and the large quantum of debt sitting on the books of Indian banks and non-bank lenders give Oaktree the chance to focus on Asia versus other markets for distress debt, according to Pedro Urquidi, head of distressed debt, Europe & Asia.

Both China and India are on a deleveraging drive, with China accelerating its deleveraging efforts after getting levered up post the global financial crisis of 2008, Urquidi said. The quality of assets that Oaktree has found in China and India in the recent past is better than the regions like Europe. But since the private debt markets in countries like China and India take time to re-price themselves, Oaktree will look to invest additional capital “opportunistically”.

• Oaktree s also moving more money to public markets like the U.S. post this correction as opposed to investing large incremental money in Asia distressed debt here on because the best relative opportunity is in the U.S. distressed debt.
• The headline in India is not only Covid-19, but also the credit crunch in the shadow banking system that started with IL&FS.
• Oaktree is trying to lock down some opportunities in the NBFC space in India and the dislocations due to Covid-19 might give it the pricing it wants.
• Covid-19 will not be the talking point in India and China a year from now.

The stress between Saudi Arabia and Russia triggered the moves in emerging market debt but there is a great deal of illiquidity and valuations are not correcting very much, ccording to Julio Herrera, portfolio manager, EM debt. Countries like China, India, Turkey and South Africa will do better if oil prices stay lower for a considerable period of time.

• Oil companies and airlines debt is the only pocket that is showing big dislocations.
• Emerging market governments and central banks will not be able to fire up economies because no one else other than China has the firepower to give a fiscal boost.
• And rate cuts alone may not work to prop up economic growth this time around.

While the trade war and the coronavirus scare started with China, on a rolling one-year basis it has outperformed the U.S., according to Frank Carroll, co-portfolio manager, EM equities. Other emerging markets, which have had their currencies underperform, are dragging the MSCI Index lower.

• The knock-on effects for specific sectors such as travel remain to be seen, but the demand and oil shocks have caused valuations to fall anyway.
• Oaktree wants to buy good businesses at these valuations but is getting low visibility about the future from companies it talks to.
• Some quality companies are moving to the cheaper end of their historical ranges and Oaktree wants to take advantage of that.
• India has been in an economic slowdown and Oaktree is a bit concerned about Indian equities relative to the rest of the emerging markets.