The Indian equity market has shown strong resilience to a selloff across global financial markets amid fears of a potential default by Chinese property developer Evergrande. Benchmark indices, Sensex and Nifty50 nearly recovered all of their previous day's losses despite weakness in other Asian markets.
A test for Evergrande Group will be this week when it is due to meet some payment obligations relating to interest on bonds.
Evergrande has been scrambling to raise funds to pay back many of its lenders, suppliers and investors, with regulators warning that its over $300 billion of liabilities could spark broader risks to the country’s financial system if not stabilised.
Analysts believe that a credit event for Evergrande seems unavoidable, but the extent of a spillover effect into other markets will be contingent on whether Evergrande restructures or fully liquidates.
Evergrande’s total liabilities are at around $313 billion, which is about 6.5 percent of the total liabilities of China's property sector. Evergrande Group has close to $19 billion in total offshore bond outstanding, equivalent to roughly nine percent of the total offshore bond market, and 12 percent of the total high-yield offshore bond market.
Experts are of the view that the most likely scenario for Evergrande is a negotiated restructuring versus an all-out liquidation.
“The repercussions of this event does not look big as the Chinese government is expected to provide support to the company. The amount of the company’s offshore debt is also low so there will not be any major risk to other markets, and especially the Indian markets,” said Kunj Bansal, Business Head (PMS- Equity) at Karvy Capital.
However, a slowdown in China’s economy and the real estate sector will hurt the Indian commodity sector the most. Commodity exporting companies, such as steel and iron ore, will be the first to bear the brunt of a demand slowdown in China.
Indian exporters, dealing in steel and iron ore, would be a major loser in case of an economic slowdown in China.
Bansal believes this can also be an opportunity for other Indian players to compete in the global markets against China.
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Meanwhile, industrial metals fell sharply amid concerns about the impact on the global economy amid the spread of the Delta variant of Covid-19. This prompted investors to rush towards the dollar as a safe-haven bet. An appreciating dollar made the dollar-priced industrial metals more expensive for those holding other currencies.
“Debt fears come in line with the slow expansion in China’s economy following the recent outbreaks of the virus and disrupted supply which triggered the fall in industrial metal prices. Markets are expected to remain cautious ahead of the outcome of the two-day Federal Open Market Committee meeting. Any Hawkish comments by the US Fed chair Jerome Powell might further strengthen the dollar,” said Yash Sawant, Research Associate at Angel Broking.
Analysts rule out a further big correction in the Indian equity market ahead, but remain concerned over high valuations and expect high volatility in the short term.
“Valuations are really stretched. If you look at the overall market valuations, we are trading at over 3.5 or something in that range of price to book versus much lower valuations than we have seen historically, so overall, I would say our risk levels are a little higher now, given what is happening globally,” Punita Kumar Sinha, managing partner of Pacific Paradigm Advisors and chairperson of InCred AMC, told CNBC-TV18.
Mixo Das, APAC Equity Strategist at JPMorgan, said that the long-term outlook for India looks very strong and believes the Evergrande issue will not become a global contagion.
“The long-term outlook looks really good but in the near term, maybe it is kind of peaked for the year and we could see the market just going sideways from here because, at current valuations, it is very difficult to justify further upside in the major segments,” Das told CNBC-TV18.
