Even as local authorities rush to cushion the fall of the Evergrande group – China’s second-largest real estate developer in terms of sales – which can create a float in global financial markets, Christophe Bois, Global Head of Equity Strategy at Jefferies suggests that the structural bull market in India remains intact. It increased its stake in Bajaj Finance in its long only portfolio in Asia ex Japan by 1 percentage point (ppt). Wood had bought a stake in the company earlier this month.

“A broader, private sector-focused cycle of capital spending, extending beyond the real estate sector, is now being considered by the Jefferies Indian office in just one year from now. Another positive element is the growing evidence of job creation. India also appears to be at a major profit inflection point, with the corporate earnings-to-gross domestic product (GDP) ratio rebounding from an all-time low of 1.2% in FY20 to around 2.1 % in FY 21, ”Wood wrote in GREED & Fear – his weekly note to investors.

On Friday, the S&P BSE Sensex broke the 60,000 mark for the first time. The cash-driven rally saw the index gain 25 percent calendar year-to-date (CYTD). The rally in mid and small caps was more marked, with the two respective indices having jumped 42% and 55% during this period.

Goldman Sachs analysts expect capital flows to remain strong going forward, given the strong IPO pipeline. “We estimate $ 12 billion in passive purchases resulting from the potential inclusion of unicorns in MSCI India over the next two to three years. Strong investor demand and the resulting capital flows could keep equity valuations high, support the rupee and further catalyze the financialization of household savings, ”Goldman Sachs analysts led by Timothy wrote. Moe, their co-head of Asia macro research and chief Asia-Pacific equities strategist. in a recent note.

Risks for the rally

Aside from the risk of another wave of Covid, the main domestic risk for the Indian stock market, according to Wood, is a change in the accommodative policy of the Reserve Bank of India (RBI), which he says will only be that progressive.

While the central bank has raised its inflation forecast in recent meetings, it has yet to signal a change in policy direction. The RBI increased its CPI inflation forecast for this fiscal year to 5.7 percent at its policy meeting in August, from 5.1 percent expected in June. That aside, he announced phased increases in the amount of funds to be subscribed through variable rate reverse repurchase agreements.

Training effect

The development of Evergrande, Wood said, will have a ripple effect on Wall Street correlated global markets that have become accustomed to bailouts.

“Evergrande’s acute liquidity crisis, signaled by the 86% collapse in its share price since late February, has been almost inevitable since China launched its ‘three red lines’ policy in August 2020 asking developers selected real estate to comply with specific financial ratios, ”Wood wrote.

The three red lines are a set of thresholds on three financial ratios, Liabilities (ex-products of advances) to Total assets, Net debt to equity and Cash to short-term debt, led by the People’s Bank of China (PBOC) and the Ministry of Housing in China, which seeks to cap the borrowing of developers.

The real risk given Evergrande’s development, according to Wood, is that the responsible technocrats, who have been in charge of China’s extensive deleveraging policy since 2016, of which the “three red lines” policy is a manifestation, will come out. from the scene.

“It would make greed and fear nervous precisely because they have proven themselves to be so proficient in implementing the delicate balance of bringing market discipline into the system without blowing it up,” Wood said.

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