China Evergrande Crisis: What experts say about the impact on Indian stock markets, sectors and more

China's Evergrande crisis continues to grab headlines across the globe with respect to financial markets. Now, investors in India have questions on mind about what next and the road ahead. Here is what financial markets experts opine on the crisis surrounding China's biggest real estate player and its impact on stock markets:- 

Santosh Meena, Head of Research, Swastika Investmart Ltd. said, "Global markets are volatile amid worries coming from the Chinese real estate sector as Evergrande, the second-largest developer in China is on the verge of bankruptcy. We have had an overleveraged issue in China for a long time but its repercussions are becoming visible now amid strict regulations by the Chinese government. It is very difficult to say about the actual events in China due to lack of transparency however it is being said that the Evergrand is not likely to collapse all of a sudden but global markets are looking for any policy action by the government to restrict the domino effect."

"The Chinese markets will resume their trade tomorrow after a long period of holidays where it will be important to see investors' reaction in their own market and then global markets will take cues from there. The global markets will remain volatile ahead of the FOMC meeting. If Global markets show any weakness and if there will any rise in the dollar index and US bond yields then we can expect our market may also witness selling pressure where 17250 is critical support the Nifty; below this, there is a risk of sell-off towards 16700 level."

"If the slowdown problem rises in China then Yuan can depreciate which may have a domino effect on other Asian currencies like Rupee that may lead to some FIIs outflow in the near term."

"If we talk about the sector then the metal sector will remain vulnerable to any negative development in China as it will affect global growth whereas China has become a net importer of steel. Along with metal, we could see some impact on the Chemical sector because China is becoming a net importer from an exporter in the chemical space as well."

If we talk about the real estate sector then the Indian real estate sector is completely different from China and the Indian real estate sector is bottoming out both in terms of volume and price and we are going to see a strong recovery in the Indian real estate market but we can expect near term volatility due to Chinese problem." 

Ashish Chaturmohta, Director Research, Sanctum Wealth, said, "We are of the view that, any negative sentiments towards China would always be beneficial to India. Coming to the Impact of Evergrande, we believe the impact would be minimum as China is a closed economy and the crisis is a Country specific crisis. H mce, China would surely solve the problem before it becomes worst. In the current situation markets are at peak and any corrections would be an opportunity to enter and build portfolio. Hence, talking prima facia it doesn't look like nifty would test 17000 levels. China is major producer and Consumer of Steel and has the largest natural resource hence it dominates the commodity markets. If the situation gets worst, housing sectors etc can be impacted leading lower demand of steel and other related products. Hence we can see some pressures as there would be price correction."

Navneet Damani, Head of Commodities & Currencies Research, Motilal Oswal Financial Services Ltd, "Metals have been under pressure today on buzz over Chinese firm Evergrande facing financial trouble and speculation over default on debt payment, which has led to a selloff in most risky assets. Metals complex has been roaring since the start of the year and looked quite overheated given the change in stance from Fed over its bond purchase programme and weaker data coming out of China over the last couple of months. Some metals have doubled from lows hit in 2020 and could find it difficult to sustain such highs, given the rapidly changing macros and spread of the virus once again. The market may have found its reason for a cool off / correction and we remain cautious on most metals in the short term. Medium term picture still looks promising, but the weak hands will have to find their way out in the short run."

Gaurav Dua, Head - Capital Market Strategy, Sharekhan by BNP Paribas,"Global markets are feeling the heat of the default on $300 billion debt by leading Chinese real estate major, Evergrande. The delay in intervention by Chinese authorities to limit the contagion risk is unnerving financial markets globally. Though the authorities in Beijing are expected to come out with a bailout package soon, the event could drag down the Chinese economy and consequently, the global economy and commodity prices. The unfortunate event has come at a time when the global markets are already facing headwinds of tapering of quantitative easing (QE) by US fed in the coming months. In India, the run up to UP election could also create some anxious moments for equity investors. Accordingly, we have been advising reducing exposure to high beta and high risk small-cap space in favour of large-cap stocks from IT services, pharma and FMCG sectors."

Asheesh Chanda, Founder and CEO, Kristal. AI, said, "High-level view:- We don't expect the Evergrande risk to be another Lehman / AIG event as of now as we believe there is sufficient ammunition available to counter, if risks become systemic. At this point, we believe that the Chinese government is unlikely to bail them out and we might see a controlled / managed default. As such, we think there is likely to be contagion in Chinese short-term paper, bond-linked structured deposits and the HY market in general. However, given it is unlikely to be systemic, this could present buying opportunities down the road in high quality issuances. 

Risks unlikely to be "systemic"

Firstly, when we look at Chinese credit, we are seeing spreads widen in pockets like short-term commercial paper, bond-linked structured deposits and overall HY but it is still orderly. Also, high quality names have been immune till now to a large extent. Having said that, it is fair to assume that if Evergrande does default, there is a high likelihood that Chinese HY will suffer and we could see contagion. However, that might actually present buying opportunities in high quality issuances like Country Garden, Sino Ocean etc. that could benefit and even take over the more lucrative projects from a liquidation. 

Secondly, in China banks hold 80% of the debt, so that's the route through which this could become systemic. However, there are 2 key differences with the Lehman crisis - a) Bank balance sheets are strong - they are plush with deposits right now, reducing exposure and have been preparing for this event for the last quarter or so, and b) China has sufficient FX reserves to simply bail them out if it does start to look systemic.

Thirdly, Evergrande bonds are already trading close to 25 cents on the dollar, i.e. they are already pricing a high probability of default. In other words, a lot of bad news is already in the price. So, unlikely to become systemic from here on even though we might see spreads widen a bit in the high yield space. 

One place outside of China that could see some pressure is the European luxury segment (e.g. LVMH) where ~50% revenues come from China and to that extent there could be underperformance in that space - again not enough to be systemic but enough to serve as a headwind. 

"Bail-out" not our base case

The government doesn't want to come across as trying to save the rich at the expense of the masses and that's why they haven't stepped in till now ("Common Prosperity Initiative"). We think that the Chinese government is unlikely to step in and would rather allow a controlled default based on the current state of affairs. That's also in line with market pricing right now."