What is your view on the market? Do you believe that a little bit of cool off was required because we had gone up quite vertically for the last few days?
Yes, to be honest, there is always a little bit of a correction and that is always welcome. We would expect the markets to correct as much as 8-10% in normal circumstances. This is only a 1-2% fall from the top. I do not think it is particularly concerning but the impact of Evergrande default that has been happening over the last few weeks, will only be known a couple of weeks from now to see how big the contagion is. We will see whether this gets deferred or not. Right now. it does not seem so bad.
We have seen the big Lehman crisis, what happened with taper tantrums, what happened with various other defaults across the globe and with various big companies. Markets always tend to come back but there is a near term uncertainty of flows. A person invested in India bonds would also get hurt with the Chinese bonds defaulting, Is that the reason for the nervousness in the market?
Yes. So everything is connected in some way or the other. I will give an example. Let us say there is a big fund that is invested in Evergrande and Evergrande default; the investors in that fund redeem their investments. The fund has to sell something. It cannot sell the Evergrande bonds. It looks at what else it owns. Maybe it owns a little bit of India, a little bit of Singapore or something else. It sells them and tries to get enough money for redemption. So they will sell their good assets just because some other asset has gone bad and that causes a contagion going down. This will affect the bond markets eventually, it will affect the commodity markets.
What is happening right now is largely in the commodity markets. It will eventually flow to equity. We are seeing it happen now and tomorrow it may flow down to bonds as well. The question is whether authorities will come in hard to curb the problem and infuse more liquidity? That is the usual solution before it becomes too big. We may just get caught in the crossfire. Our economy may be doing okay in comparison but we will get impacted just by liquidity, the same way we got positively impacted by liquidity in the last one year.
Talking about Evergrande, look at the size and the slowdown in real estate that is expected. The first causality we are seeing is not in the property market, but in the commodity market. It’s iron ore, because steel demand may go down. Back home, just see what is happening with , JSPL, Hindalco. How should one position themselves given all the uncertainties because this could just be the start of more bad news?
Absolutely. In fact, if you look at commodities, in general, even without a crisis like this, they go up and down in cycles. The price of iron ore would have risen before the price of steel. The last two or three weeks we have seen iron ore crashing quite substantially in the commodity markets and it will impact steel prices as well. It has not yet impacted it in a substantial way but I am sure it will.
China is one of the largest producers of steel in the world and curbing of exports meant that there was a lot more space for other countries to operate. China was actually importing some steel from the Indian players themselves and that is something that might actually reduce quite substantially, given that China is such a big producer. If it cannot consume its steel locally, it will end up exporting it and that will curb steel prices worldwide.
Commodities which are going through cycles are getting exaggerated. Now, both the upside and the downside have got substantially exaggerated in the last one or two weeks. One should be careful if one is a commodity investor and should be aware of cycles. But overall, it just seems like a cyclical move and not something that will crush the market completely. I may be wrong here. It is early days yet.
