The threat of a meltdown of Evergrande is looming large over Asia, and India cannot claim a total respite from its impact. The Beijing government has not come out with any bailout package and has insisted that interest payment must not default. In the earlier occasions to Evergrande had a bailout, largely by the owner’s personal friends to the tune of $16Bn. The company was to pay $83.5 million interest on Thursday for its March 2022 bond, and another $47.5 million interest payment would become due on September 29 for March 2024 bonds. Both bonds will default if the real estate group fails to settle the interest within 30 days of the scheduled payment dates.
A default would also throw a massive sum of $300 Bn or Rs. 2,21,11,84,50,00,000.00 which is nearly 2% of the GDP of China. During the U.S. Lehman crisis of 2007-09, the U.S. government moved quickly to fund the banks and bailout a rescue. The Chinese government might hesitate to intervene as Evergrande is not the only reality company that might bust in an economy with a 78% reality share. Many investors have bought properties under construction, which may never be completed, as suppliers have stopped material flow to Evergrande.
The jubilancy in the Indian bourses now seems to me an overplay, and the bubble could burst anytime, if not for China, correcting on its own all-time highs. The scenario of delving in stocks is akin to tumultuous Harshad Mehta times, when everyone, from a clerk to a small shop owner, invested their hard earn monies dreaming of making it big. It lasted a while until the fairy tale ended harshly, many losers committing suicide, including the Chairman of Vijaya Bank.
For the high Sensex, the trading stocks must have been grossly undervalued, or the ROIs have grown substantially. Neither is the case. The retail investors are not much bothered with what percentage of return they will get from the shares. They will book profits as soon the first signs of slippage is visible over the horizon, leading to a contagion effect. Instead of exposing bank’s risk with loans to companies, the government has forced the companies to take the stock-exchange route while pushing the depositors away from banks to the stock market, with hopes of high returns.
The burgeoning stock values help the companies to seek additional funds from the banks, who are happy to lend with cheaper deposits costing the banks a measly five per cent. The companies must repay when the share prices fall and taking down the asset value mortgaged.
The turmoil in China might push FIIs to sniff the Indian market, where still a few scrips are selling at manageable levels. Right now, it is a frenzy. Even food delivery outfits with no tangibles rake in the moolah. Social networks are full of pundits predicting a glitzy future for many penny stocks, the gullible public taking the bait.
I am waiting for a correction and hope it will be to the tune of 8K-10K. From the total market capitalisation of US$3.4044 Tn, even a 10% fall would equal to Evergrande’s total debts of $300 Bn.
Tread with caution, keeping greed at bay, is all I would advise, as I see correction clouds not far.
Sampath Kumar
Intrépide Voix
