Calm before the storm? Look towards east, not west, for the next big scare

NEW DELHI: It’s good to be on Dalal Street these days.

The domestic equity benchmarks have steadily surged close to 20 per cent from their 52-week lows, as multiple factors have aligned in favour of the equity market globally, reviving risk appetite among investors.

It’s calm and sanguine, isn’t it? But is it the proverbial calm before the next big storm?

“The stock market has been calm. So that is a point of concern we all need to be aware of from a near-term perspective,” said Pankaj Tibrewal, Fund Manager - Equity, Kotak Mutual Fund.

“Global equity markets have been very calm for too long and that always throws up chances that someday something will come up suddenly,” he said.

The past is a great teacher and a look back into the market movement in the past three months suggests this calmness is holding a storm in its belly.

Last year, before Grexit and China took their toll on sentiments, the market ran up to hit life-time highs.

Then the run dissipated after the China scare and before the US Federal Reserve’s first rate hike in a decade. The past six months has been etched well in investors’ memory.

What is the next big scare?
It’s not new, but it’s substantial. And it lies to your east, not to the west.

China’s currency renminbi or yuan has been slowly heading towards its lowest level in calendar 2016. It has depreciated close to 1.7 per cent in the offshore market over the past one month alone as the dollar’s upward surge has taken its toll on the currency.

Last time, when the yuan had depreciated by a similar measure, it triggered a chain of events that left a 15 per cent gash on the Sensex and set the world talking about an impending global recession.

“We are not so worried about the Fed hiking rates once or twice in this calendar year. But what we are worried more about is Chinese policy action. Among them the devaluation of the Chinese currency plays an important role,” said Pankaj Tibrewal.

Tibrewal is concerned that an 8-10 per cent devaluation of the Chinese yuan can throw the market off-track and set into motion another cycle of risk-off trade.

“If an abrupt 8-10 per cent devaluation happens on a single day, the market will suddenly wake up. If this not what we were expecting, you could see a kneejerk reaction in the global financial markets,” he said.

It’s nothing to worry about?
For S Naren, CIO of ICICI Prudential Mutual Fund, a risk-off devaluation of the Chinese yuan is minimal to negligible.

“I am not worried about the kind of thing the market seems to be worried about. They are saying if China devalues from here on, I do not see that kind of a situation surfacing,” he said.

“If you look at the data out of China, it looks pretty good. We are not worried about this negative volatility,” he said.

But the relief of March and April in terms of economic data streaming out of China is showing signs of tapering off, as fiscal and monetary stimulus have not helped revive the economy.

That and the trend of excessive strength that the dollar showed way back in December were some of the prime drivers of yuan devaluation back then, which makes Tibrewal’s concerns worth heeding to.