Why are equities ignoring the signs out of China?

Why are equities ignoring the signs out of China?

Equities 7 minutes to read
PG
Peter Garnry

Head of Equity Strategy

Summary:  Global equities are in their second longest rally with a drawdown of 5% or less since 1999 and this is despite record high equity valuations, an economic slowdown due to the Delta variant, power shortages in Europe and China, and recently a group of Chinese real estate developers are under growing pressure. All these factors should have risk alarms sounding but equities remain cool and calm.


There are many dynamics at play this year in China. The country’s housing market has for years been highlighted as overleveraged and a key risk for China without ever turning into a crisis. In recent months China’s biggest real estate developer China Evergrande Group has spiraled into a liquidity crisis declining 91% from the peak in July 2020. For now equity markets outside China are calm indicating, under the assumption that markets are efficient, that investors believe this is not a systemic risk for the global financial system.

Source: Saxo Group

Evergrande, which local bonds were suspended today, has effectively gone into a restructuring phase which will cost shareholders and bondholders, but the Chinese government will try to limit the negative effects on the banking industry and the people that are waiting for their homes to be built. However, the stakes are increasing as risk aversion increases in the industry and already now there are signs that other real estate developers are experiencing some increased pressure. The table below shows some of the largest Chinese real estate developers with a combined market value of $131bn and $291bn in short- and long-term interest bearing debt, but total liabilities of $1.06trn. For comparison Lehman Brothers had $613bn in debt when it filed for bankruptcy.

The Chinese government has the ressources to soften the impact from the ongoing issues in the housing market and in fact the situation can be showcased as exactly why a new policy trajectory is needed. China Vanke said in July that the glory days of property development are over, so the industry has seen the writing on the wall. Under the new policy trajectory of China we know the emphasis is on ‘Common Prosperity’, self-reliance, and the environment, which means that investments will be redirected into semiconductors, renewable energy, and other key technologies. Back in August, we recommended investors to stay away from the Chinese technology companies within social media content and gaming, and instead focusing on consumer oriented companies. This is still our view.

Supply side issues are growing

Iron ore prices have lately been under severe pressure and as more prices of the puzzle are revealed it is now clear that part of the reason is maybe Chinese factories including steelmakers shutting down production due to power shortages. The world is currently facing an ‘energy shock’ with Europe experiencing dramatic increases in electricity and energy prices. Liquified natural gas is in high demand from China and Japan, while Europe is also scrambling to get supplies as Europe has been hit by a perfect storm of lower than normal electricity production from renewable energy sources. At the same time coal prices are soaring as well adding further pressure to Chinese producers which in turn could keep the inflationary pressures running globally.

For now equities are staying calm, but the growing evidence of dissonance in the global economy and equity markets cannot be ignored for too long. The dominos are in motion now and it is just a matter of time before we get a healthy correction in equities reflecting the growing issues in our global economy.

Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.