As market rally remains ‘Evergrande,’ analysts look to the US Fed for cues

PALAK SHAH Mumbai | Updated on September 22, 2021

Bourses shrug off so called China’s ‘Lehman Moment’

Touted as the ‘Lehman Moment’ of China, concerns around the potential collapse of China’s real estate giant Evergrande turned out to be short-lived for now as global stock markets rebounded from Monday’s sharp fall.

Defying the negative commentary by analysts from Dalal Street to Wall Street over the troubled Chinese realty major, the global share markets shrugged off fears of a contagion by making a sharp comeback on Tuesday. India’s benchmark index Sensex rose 514 points, or 0.88 per cent, to touch close above the 59,000 mark. The Nifty index gained 165 points, or 0.95 per cent, to end at 17,562.

‘China-centric crisis’

“For now, Evergrande seems like a China-centric crisis with no major cross-country financial woes. For stock markets to crash, as in 2020, we need something out of the box. India’s mutual fund industry has grown from ₹3.5-lakh crore in 2016 to ₹36-lakh crore now. Currently, MFs, insurance companies and other domestic investors are sitting on cash of more than ₹1-lakh crore to be deployed in stock markets... they are sitting on just 2-3 per cent cash. It’s a major reason markets will not fall for now unless the US Fed changes course on easy money,” said Rahul Arora, CEO, Institutional Equities, at Nirmal Bang.

Global stock markets have been on high alert since Monday as Chinese real estate giant Evergrande, founded by businessman Xu Jiayin in 1996 in Guangzhou, struggled to meet interest payments on its debts of more than $300 billion. The trouble started after Beijing brought in new rules to control debt being taken by large real estate developers. The new measures led Evergrande to offer its properties at a major discount to ensure money flow to keep the business afloat. But banks stopped lending to the property developer after its cashflows slowed and rating companies downgraded the company, citing liquidity concerns.

Uday Kotak, CEO, Kotak Mahindra Bank, on Tuesday, said Evergrande could be China’s Lehman Brothers. “Evergrande seems like China’s Lehman moment. Reminds us of IL&FS. Indian government acted swiftly. Provided calm to financial markets,” Kotak tweeted.

Evergrade chairman Yuan tried to calm investors, saying the company will “walk out of its darkest moment”

Following this statement, key stock market indices in Europe were trading with gains of around 1 per cent. The Dow Jones Industrial Average rose 55.14 points, or 0.16 per cent, to open Tuesday at 34,025.61.

Analysts said the focus for the next few days for both global and Indian stock markets will be the US Fed meeting on Tuesday and the RBI Monetary policy on October 8. When the US dollar rises, all other asset classes, including stock markets, move the other way, and vice-versa.

“The most hawkish outlook (for USD) from the meeting would be if the US Fed announces tapering or even at least the timing. If this happens, we could see the US Dollar Index moving up which shall impact the rupee and all other asset classes. On the contrary, the most bearish outlook (for the US dollar) would be if the US Fed highlights concerns over the job market. If the committee keeps the policy unchanged and hints at delayed tapering, we could see a fall in the US Dollar Index. This shall be a positive for the Indian rupee,” said Heena Naik, Research Analyst at Angel Broking.

Nirmal Bang’s Arora saidys that unless the Fed announces a meaningful tapering of its bond-buying, it would not affect the bullish momentum of markets. “Tuesday’s Fed chair statement is most important and will decide the further course of markets,” he Arora said.

Published on September 21, 2021

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