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Stock markets in India and around the world were rattled by worries about the contagion risk to the global economy from a potential default by China’s second-largest property developer, Evergrande Group.

Indian stocks fell nearly 1% on Monday, led by metal stocks, as investors feared a slowdown in China, the world’s largest consumer of metal and mining products, will diminish demand.

The BSE metals index fell by nearly 7% as investors dumped mining and metal stocks over worries that Evergrande, the world’s most indebted property developer with close to $300 billion in outstanding debt, was close to defaulting on bond repayments due on Thursday.

Contagion Fears
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Contagion Fears

The BSE Sensex slipped 524.96 points, or 0.89%, to 58,490.93 on Monday, while the Nifty dived 188.25 points, or 1.07%, to 17,396.90.

Analysts said investors are worried that Evergrande’s default would have a cascading impact on China’s massive housing market, one of the largest steel and allied products consumers. On Monday, India VIX or the volatility index rose 14.84% during the day to close at 17.49.

Evegrande has said that slowing home sales has led to cash flow issues and the situation is unlikely to abate in the foreseeable future. Besides the fear of a contagion, the forthcoming policy meets of major central banks added to the nervousness as investors feared that monetary policy regulators would start giving cues about tapering their stimulus programmes at their meetings this week.

On Monday, European markets fell to a near two-month low, and Germany’s benchmark index sank 2%. This week, central banks in the European Union, UK, Japan, Switzerland, Sweden, Norway, Indonesia, the Philippines, Taiwan, Brazil, South Africa, Turkey and Hungary are scheduled to hold meetings to decide on key policy rates and whether to wind down stimulus measures that had ensured easy liquidity across the world markets since March last year.

Stock markets in other Asia-Pacific countries also fell. Hong Kong’s Hang Seng index declined 3.3% on concerns about China’s economy. Markets in mainland China, Japan and South Korea were closed on Monday.

According to Gaurav Dua, head of capital market strategy at Sharekhan by BNP Paribas, 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 when the global markets are already facing headwinds of tapering of quantitative easing by the US Federal Reserve in the coming months. In India, the run-up to Uttar Pradesh elections could also create some anxious moments for equity investors," Dua added.

Metal stocks were also dragged down because GST rates on ores and metal concentrates such as iron and manganese were raised, analysts said.

Meanwhile, the US Fed is expected to lay the groundwork for tapering at its policy meeting on Tuesday and Wednesday. However, the consensus is for an actual announcement to be delayed until the November or December meetings. The market consensus is for two hikes in 2023 and four in 2024.

Analysts at Credit Suisse Wealth Management in India said that while stretched valuations and the upcoming Fed meeting could bring some volatility, Indian equities still offer relatively better risk-reward from a medium- to long-term perspective.

“India’s macro fundamentals have improved, and we continue to expect the price-to-earnings premium for Indian equities to sustain. Investors should stay invested in equities but should focus on reducing the beta of their portfolios. The outlook for the banking sector has improved materially where we remain very constructive," they said in a note on 17 September.

Indian markets have outperformed global peers, but foreign portfolio investments into equities have been waning in the past two months. The Indian benchmark indices have risen 23-25% this year, outperforming the MSCI World index’s 16% gain and MSCI EM’s 0.2% decline.

“As the Fed and other central banks would consider the current pandemic situation and rising delta variant cases in the US, we believe stimulus would continue. This would support liquidity. India is better placed than many other developed countries in terms of control on covid cases," said Mitul Shah, head of research at Reliance Securities.

However, he added that if Fed decides to taper in its meeting, it will impact inflows into equity markets, including Indian stocks.

Reuters contributed to the story.

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