Greek Impact: Indian markets may see selloff soon, fund managers sound caution

MUMBAI: Is the market exhibiting the proverbial calm before the storm? The unexpected strength in Indian stocks on Monday despite Greek voters opting against the bailout terms of Eurozone members and international lenders is being greeted with abundant caution. Fund managers are betting on a selloff in emerging markets — including India — soon, as investors await the fate of the perilously placed Greek banks, gasping for fresh funds from the European Central Bank to stay alive.

Indian stocks erased losses and ended higher, bucking the weak trend in other Asian markets, led by a rally in top pharma stocks. Benchmark indices closed at their highest in twoand-a-half months on Monday.

On Monday, the Sensex gained 115.97 points, or 0.41%, to close at 28,208.76, after falling almost 1% earlier in the day. Nifty rose 37.25 points, or 0.44%, to end at 8,522.15. Elsewhere in Asia, Hong Kong's Hang Seng fell 3.2% while Japan's Nikkei 225 dropped 2.1%.


India is unlikely to outperform its Asian peers if the crisis in Greece's near-dormant banking sector deepens and there is a flight to safer assets from emerging markets.

"One should not read too much into the market strength today (Monday). The impact of the crisis on the market will play out over the next couple of weeks once Greece's financial system starts imploding if no quick-fix solution (starting with injecting liquidity into Greek banks) is delivered immediately," said UR Bhat, director, Dalton Capital Advisors India. "There is likely to be a broad risk-off trade in emerging markets without an immediate quick-fix solution," he said.

Investors are betting that Greece will be able to wriggle out of the situation possibly with the help of European Central Bank (ECB) and pushing lenders to take bigger writeoffs. But that is easier said than done. International lenders to Greece do not have the room to make further adjustments for the country as this could lead to similar demands from larger debt-laden economies such as Italy, Spain and Portugal, which have been adhering to strict austerity conditions of creditors. Markets are worried that Left-wing parties would be voted to power in these countries too, like in Greece, on the premise that they too would force lenders to temper the strict fiscal discipline.

An emerging market fund manager, who spoke on condition of anonymity as he is not allowed to talk to the press, said ECB would try to protect Eurozone's banking system.

"If the contagion spreads, Eurozone's banks will be forced to do sharp writedowns. Nobody knows how that will impact financial markets," the fund manager said. "The Greek crisis will loom over the market for some time because the issue is political and will involve more countries," he said.

Investors will closely watch the details of the new aid proposal that Greece's Prime Minister Alexis Tsipras has agreed to present in the wake of Greek voters saying 'No' to the unpopular diktats from other Eurozone nations and international creditors in return for more aid.

Analysts said the stepping down of Greece's hardline Leftwing finance minister Yanis Varoufakis has sparked hopes that the government would be more open to creditors' bailout terms.

Greece will have to cobble together a deal with its creditors before July 20, the next major repayment deadline when the country has to pay ECB 3.5 billion euros. Last week, Greece defaulted on its loan repayment to the International Monetary Fund.