Head of Saxo Strats
Summary: Evergrande shares are up 18% today following a rare exchange filing by management last Friday stating that the company is healthy and rejecting all rumours about its creditworthiness and liquidity issues. Ping An also boosted confidence in HSBC by raising its stake and publicly stating that it believes in the long-term prospects of the bank. For now the confidence game has been won with both shares up in today's Hong Kong trading session.
Today’s session saw a relief rally at two major Hong Kong listed stocks, HSBC and Evergrande, driven by confidence statements in both cases. Evergrande is one of the largest Chinese real estate developers and owners with around $120bn in debt but had experienced a 52% decline in its share price from the highs in early July to the lows last week. Talks among market participants had accelerated that the company had liquidity issues and the recent stronger USD was another contributing factor as a stronger USD usually puts pressure in offshore USD markets and emerging markets.
In a rare exchange filing late Friday, Evergrande’s management reassured the market that its real estate business was healthy and that no interest payment had been skipped. In addition, it said debt had been reduced since March. The confidence game was won over the weekend and the stock was 18% in today’s session. However, the situation is dynamic, and volatility is likely to remain high if the global economy continues to face headwinds. Evergrande with its massive debt on the balance sheet and potential contagion effects to banks (collateral values) is clearly a systemic risk to the Chinese financial system and thus our view is that the company enjoys an implicit backstop. With credit in emerging markets in general under pressure, as described by our fixed-income specialist Althea Spinozzi, the market should pay attention to developments in Evergrande and other large EM stocks. Especially since Bloomberg’s default risk model has pushed Evergrande into elevated territory.
HSBC and the wider banking problem
HSBC shares are up 9% in today’s session following confidence statements from its biggest shareholder Ping An Insurance Group. The Chinese insurance group announced that it had increased its stake marginally to around 8% and said that it has confidence in the long-term prospects of the bank. The cancelled and subsequent discontinued dividend is viewed by Ping An as short-term and that dividends will resume as the outlook improves. The bank hit lowest levels since 2009 last week with shares down 64% since the highs in early 2018 troubled by its loan book and deteriorating business in the US and UK. Market trust is the lowest since 2007 measured on the price-to-tangible-book indicating that the market believes profitability will remain low and below the cost of equity for the bank. With the increased stake from Ping An and the geographical (50/50) split between Asia and non-Asia coupled with the increasingly difficult political environment between Washington and Beijing could put a split of the bank with two listings on the table.
Tomorrow, we will follow up on European banks in general which traded at the lowest levels since 1987 as we alluded to in today’s Saxo Market Call podcast. Provisions have been rising to levels three times the realized cost cutting and consensus has lowered net revenue by $100bn for the current and next fiscal year underscoring the tough environment for banks. At one point this must get the attention of the market but even more importantly the EU Commission and the ECB. More on that tomorrow.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
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