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Analysts agree China, Greece and US Fed developments need careful monitoring but India should gain, over time, from relative rise of the dollar and fall in commodity prices.
Developments at the global level seem to be taking centre-stage, with equity market participants closely monitoring developments in China and Greece, beside the coming meeting of the US Federal Reserve for clues on the timing of its first rise in interest rates.
After rising 155 per cent in the past year to a peak of 5,166 on June 12, the Shanghai Composite has fallen 32 per cent till Wednesday.
To halt the slide, People's Bank of China (PBOC) announced liquidity support to China Securities Finance Corp (CSFC) that manages the nation’s short selling and margin trading.
The euro zone has given the government of Greece until Thursday to present new proposals for securing a deal with creditors, after the country in a referendum rejected the earlier bailout proposal on Sunday.
A full summit of European Union leaders has been called for the coming Sunday.
What is the road ahead for equity markets and how insulated is India?
On China, analysts at Nomura suggest there could be more pain in store. “Our full-year target range for the MSCI-China is 66-90. We believe we are more than halfway through the correction that will end in July/August.
We expect the index to finish the year higher than its April peak and that the current bull market in the MSCI-China will peak in 2017,” said Wendy Liu, Vicky Fung and Erin Zhang of Nomura in a July 7 equity strategy report.
Since 5 July, major European indices – FTSE 100, CAC 40 and DAX have lost 2.3% - 4.3%.
Despite the turmoil, experts expect India to remain in a sweet spot from a long-term perspective that should gain from relative strengthening of the dollar and a likely fall in most commodity prices. They, however, do not rule out a knee-jerk reaction in the immediate term.
“”These are big developments, especially within China, that would impact all asset classes. It is more to do with an overall risk-off sentiment. We will see money being pulled out on a risk-off basis, rather than anything else, in the immediate term. Having said that, the road ahead for commodities will be tough. India would be impacted in the shorter term, given the likely risk–off sentiment globally. Domestic events, too, are likely to keep the markets volatile,” said Vaibhav Sanghavi, managing director, Ambit Investment Advisors.
However, Abhay Laijawala, managing director and head of research, Deutsche Equities India, feels PBOC’s statement on Wednesday morning on providing ample liquidity support to CSFC should assuage concerns but one needs to monitor the situation.
“We will see a further entrenchment of emerging market differentiation as a result of three things – a) what is happening in China; b) developments in Greece; c) run-up to the lift off in rates by the US Fed. All this will manifest in strengthening of the dollar. Here, we strongly believe that India will strongly stand out within emerging markets, as it is the only real and meaningful importer of commodities within these. The return of government spending is also being viewed positively, as an indication of macro economic stability coming back,” he says.
Adding: “Given the developments in China, the strengthening of the dollar and the Iran nuclear deal, commodity prices are set to move lower, which should benefit India. The central bank has also managed the rupee well, which has been steady during all this turmoil. We maintain our December-end 2015 target for the Sensex at 31,000 levels.”
