Is Evergrande impacting popular buy-the-dip strategy? Is Evergrande impacting popular buy-the-dip strategy? Is Evergrande impacting popular buy-the-dip strategy?

Is Evergrande impacting popular buy-the-dip strategy?

Saxo Stories
Søren Otto Simonsen

Senior Investment Editor

Summary:  Markets finally reacted to the uncertainty coming out of China's real estate market as the S&P 500 closed trading more than 1.5 % down on the day Monday. The reaction comes on the back of China's largest real estate developer, China Evergrande Group, or just Evergrande, effectively entering a restructuring phase when local bonds were suspended Thursday - an event that was more or less ignored last week, as our Head of Equity Strategy, Peter Garnry, reported.


Markets are holding their breath until Thursday where Evergrande has two bond payments due. If the real estate developer defaults on its payment there seems to be a real risk that the global financial markets can be thrown into turbulent times – also more turbulent than the event would justify, according to Garnry. “Equities have moved so high that a selloff has long been overdue. Now the Chinese housing market situation became the excuse for selling out. If Evergrande defaults on its payments Thursday, it is fair to assume that markets can go further down even though the Chinese government has the tools and power to soften the blow. It is a serious situation, but it doesn’t have the global scale to merit a new financial crisis,” he says.

The negative global reaction to the Chinese crisis begs the question why otherwise efficient markets correlates things that doesn’t necessarily hang together. As Garnry points to in the above, what is happening in China – while being serious and potentially impactful – can also serve as an excuse for some investors who have moved themselves into a position where they would want to offload a portion of equities but haven’t had a good reason to do so.

What does buy-the-dip as a strategy mean?

To understand this argument, there’s two relevant factors. One is the long-term upwards trend that global equities have experienced in the last year. The second is the concept “Buying-the-dip,” which can be put into the bucket of technical trading concepts. It refers to the idea that once an equity falls sharply – the dip in a graph – there’s a tendency for it to quickly rebound and rise in value again, especially in times where the market generally is trending upwards.

Understanding buy-the-dip

With the positive mood on the markets the past years, it seems as though many investors have bought into this strategy and helped the self-fulfilling prophecy of markets moving up after falling. This, in turn, has moved equities higher and higher and since dips have ended in financial gains there hasn’t been any good reason for investors to sell equities. This may lead some investors to stay long in equities even though their mandate or analyses suggest otherwise. In such a situation, an event like the Evergrande crisis – even though it shouldn’t translate to a global issue – could be a trigger for investors to offload instead of buying the dip.

The question is, then, how much investors will let the markets fall before the dip becomes deep enough for them to ignore the Chinese real estate sector again.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research 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. To the extent that any content is construed as investment research, you must note and accept that the 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 under relevant laws.

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

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo Capital Markets HK Limited holds a Type 1 Regulated Activity (Dealing in securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged foreign exchange trading); Type 4 Regulated Activity (Advising on securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong

By clicking on certain links on this site, you are aware and agree to leave the website of Saxo Capital Markets, proceed on to the linked site managed by Saxo Group and where you will be subject to the terms of that linked site.

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

Please note that the information on this site and any product and services we offer are not targeted at investors residing in the United States and Japan, and are not intended for distribution to, or use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation. Please click here to view our full disclaimer.