Greece, China and India: Different Issues, Different Impacts

Last fortnight when I was penning my editorial, the Greece crisis was dominating all the business magazines and channels. This time around it is the crash in the Chinese equity market that is hogging the limelight. My view, however, does not change with the change in situation and is same as before; it is not going to impact the Indian equity market to any great extent. Following the default of Greece on their payment to IMF and its voters overwhelmingly refusing a deal of billions of euros in exchange for more cuts and austerity measures in a  referendum thereafter made many market participants and observers believe that a deep cut would take place in the equity indices across the globe.

There was thus a bit of jitteriness initially; nonetheless, it subsided within a couple of days. The Indian market too saw a single day’s fall and then it marched ahead. Similarly, I believe that the fall in the Chinese equity market, which has slipped by around one-third from its June peak and which is being likened by many to the Great Depression of the US that took place way back in 1929, will not deal a devastating blow to the Indian equity market. This is primarily due to some specific reasons.

The first factor is the mean reverting process according to which prices and returns sooner or later move back towards the mean or average. The Chinese markets, despite falling by 30 per cent in a matter of less than a month, are still up by 80 per cent over the last one year. Hence, this nasty fall still makes the Chinese market one of the best performing ones and this fall is more of a mean reversion. The second factor is that unlike the US the stock market wealth effect in China is much smaller. Stocks represent less than 15 per cent of household financial assets in China and consumption growth is largely driven by rise in income rather than change in wealth. This protects many Chinese from the ill-effects of any stock market fall. Similarly, a huge part of China’s banking sector isn’t “imminently linked” to the stock market, according to an HSBC report.

Therefore I believe that Indian markets will not suffer much. On the contrary, there will be some benefits. The fall in the Chinese market will definitely help some of the smart money move to India and thereby provide stability to our market. Besides, as there is slowdown in Chinese economy, this will lead to a fall in the commodity prices, including crude oil. We have already witnessed the prices of copper trading at a six-year low. China is the world’s top copper consumer, accounting for 40 per cent of global consumption. Similarly, aluminium is trading at new lows and is already trading at prices below the cost of production of many Chinese companies. The lower commodity prices bode well for the economy at large.

This becomes especially relevant now when India is embarking on major infrastructure growth through announcement of various projects such as the Smart City Mission, Atal Mission for Urban Renewal and Transformation (AMRUT) and Housing for All. These projects will change the face of urban India. This will also go hand in hand with two other projects – ‘Make in India’ announced by Prime Minister Narendra Modi and ‘Make for India’ announced by RBI Governor Raghuram Rajan. These will create lot of job opportunities and will help to raise the standard of living in India. Our cover story this time details the entire project of smart cities and how this is going to benefit different sectors in general and companies in particular. These companies will be winners in the long run.

In addition to this cover story we are also carrying two special reports. One is about the tyre companies. Their story is very much like the Chinese market; in the last one year they have given phenomenal returns but in the last few months have witnessed a sharp correction. So what one should do with tyre companies’ stock? We are also carrying a special report on the derivative market. This is more from a beginner’s point of view.