Aviva India bets on state-run banks’ recapitalization plan for business boost

Above, the headquarters of Aviva in London. The insurer is betting the Indian government’s $32 billion (SR120 billion) plan to rescue lenders burdened with record bad loans will boost their prospects. (Reuters)
Updated 23 November 2017
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Aviva India bets on state-run banks’ recapitalization plan for business boost

MUMBAI: Aviva’s India life insurance joint venture is raising its exposure to the country’s state-run banks as it bets the government’s $32 billion (SR120 billion) plan to rescue lenders burdened with record bad loans will boost their prospects.
The insurer also likes metals stocks and consumption-driven sectors, especially those that target rural consumers, but would avoid the non-bank finance companies, Prashant Sharma, chief investment officer at Aviva Life Insurance Co. India Ltd, said.
The 21 public-sector undertaking (PSU) banks, which are majority owned by the government and likely beneficiaries of the recapitalization, account for more than two-thirds of India’s banking assets. They also have bulk of the country’s record $147 billion soured loans.
The banks are less profitable compared with their nimbler private sector rivals and were largely not favored by investors until the recapitalization plan was announced.
The recapitalization triggered a rally in the state-run bank stocks, although that has since cooled as investors await clarity on the impact of the fund injections, much of which will be via recapitalization bonds.
“Some of the money has actually come out of the more expensive private banks to some of the PSU banks, the larger PSU banks which, after the recapitalization, would be quite healthy,” said Sharma, who oversees management of about $1.5 billion of Aviva India’s assets in debt and equity.
“I think the recapitalization provides them with the necessary fuel to start growing again.”
Sharma said he still liked private sector banks, but their expensive valuations meant he had to be selective.
The insurer is “significantly underweight” on non-bank finance companies (NBFCs) due to “rich” valuations and because the tailwinds that helped grow the financiers in the past years may be “coming to an end,” Sharma said.
Other sectors on the insurer’s radar were commodities and oil and gas.
Given its cyclical nature, it would be difficult to have a long-term position on the metals sector, Sharma said, although it looked attractive on a one-year to 1-1/2-year view.
“Thanks to China supply (side) reforms, commodity prices globally have bounced back from very low levels and with this kind of commodity price level, Indian metal companies are likely to do well for the next couple of years at least,” he said, adding oil and gas was another sector the insurer was positive on.
Having hit a string of record highs this year, Indian stocks may be due for some correction, but that would be “healthy” and corporate earnings should start recovering now, Sharma said.
India’s broader NSE index is up around 27 percent so far this year.


Gulf exporters to reap oil dividend as battle for Asia market share heats up

Updated 34 min 3 sec ago
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Gulf exporters to reap oil dividend as battle for Asia market share heats up

  • Chinese exports to US fall
  • IEA ups demand forecast

LONDON: China is expected to buy more oil from Saudi Arabia and other Gulf producers as it seeks to replace US supply amid a worsening trade war with Washington.
Although China last week omitted US crude from a list of a retaliatory tariffs, analysts told Arab News that the Chinese were cutting forward orders for US oil in case the trade war escalates.
Richard Mallinson, co-founder of London consultancy Energy Aspects, said: “Chinese buyers, anticipating that crude and LNG could go on the list if tensions escalate further, are looking to alternative sources.”
Mallinson said that Chinese buyers wanted to avoid having significant amounts of US oil sitting on tankers in the middle of the ocean, which would be hit with tariffs when unloaded at Chinese ports.
“There is definitely an opportunity for Middle East producers here, and particularly the biggest, Saudi Arabia,” he said.
Andrew Critchlow, head of energy news (EMEA) at S&P Global Platts, told Arab News that there was every likelihood of more demand from China for non-US oil and “Saudi Arabia and other Gulf Cooperation Council countries were the place to get it.”
OPEC already provides 56 percent of China’s oil imports, according to the International Energy Agency (IEA). The US has also been exporting increasing levels to the Asia powerhouse.
A report by the Houston Chronicle on Aug. 13, said that US crude exports to China surged from about 22,000 barrels per day (bpd) in 2016 to almost 400,000 bpd last year and early in 2018, accounting for about 20 percent of all US crude shipments.
This summer, those volumes fell below 200,000 barrels daily, said the report.
Critchlow said that the Kingdom was currently producing about
10.5 million bpd with spare capacity of around 2 million bpd, although the closer you get to that number, the more difficult it was to extract and process, he said.
Russia could also ramp up production, but not as much as KSA, said Critchlow.
“We now have the IEA upping its demand forecast for 2019. They have increased their OPEC barrels estimate by a few hundred thousand barrels a day and by half a million a day by 2019 (for the OPEC 15),”
he said.
But the scope for increased global export potential from the Gulf was also being driven by anticipated tighter supply after the reimposition of US sanctions against Iran later this year.
Still, there was a danger of demand erosion the longer the trade wars continued, and especially if there was further escalation.
Shakil Begg, head of Thomson Reuters oil research in London, warned that by the second half of 2019, global GDP could be cut if world trade levels contracted.
That would lead to a sharp fall in the price of crude, and even herald a US recession that could spill into Europe, he told Arab News.
But Critchlow made the crucial point that the big competition in the oil market today “is to win a bigger share of the Chinese and Asian market, including India.”
He said: “That’s where the battle for market share will take place over the next decade. Also, as Iranian barrels are lost, customers in nations such as China, South Korea, India and Japan will look to the GCC and others to step in.”
US exporters will still be a big force to be reckoned with, he said. The IEA has predicted that the US will overtake KSA and Russia as the largest producer by as early as 2019.
Mallinson said: “At the end of this year and the beginning of next, the market is going to get extremely tight. And the Saudis will have to pump at much higher levels.
“When you’ve got buyers restricted from where they go, it does create alternatives to move upwards,” said Mallinson.
But he warned that if the trade war worsens, it could hobble economic growth.
“These are the two largest economies in the world and it is not good news for them getting into a conflict like this.
“But even with a severe economic slowdown, we still see a tight oil market next year. Iran and sanctions are the biggest driver.”
Mallinson said that there were two other constraints: Underinvestment in capital projects outside the US, and infrastructure bottlenecks
in America.
“Those factors are big enough on the supply side to outweigh the possibility of a sharp slowdown of growth on the demand side,” he said.