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ALTERNATIVE MARKETS UPDATE mid october 2021

18/10/2021

 
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The collapse of Evergrande last month has brought substantial volatility in the market. However, since the beginning of October, markets seem to recover from their initial shock. This could change again in the coming weeks, as the official default of Evergrande lies ahead if nothing is undertaken. Whether anything will be done by the Chinese government is still unknown. This is of additional importance, as another developer, China Property Group defaulted on 15th October 2021 over $226m in notes and rating agencies have downgraded firms in the Chinese real estate market. The inactivity of the Chinese government may ultimately be a political move, as China tries to restructure its economy and in particular what sectors should be pushed. China may try to focus on the competition with its main competitor, the US, by focusing less on real estate and more on hard technology like artificial intelligence and biotech. The crackdown of tech companies in China may hint at the opposite, although most actions target software-based companies and not necessarily hard-tech companies. Regardless of the recent issues of China, at least from a Western perspective, China has done exceptionally well over the past 20 years as Figure 1 shows. China has increased its power massively with a contribution of more than 10% of the top 100 most valuable companies. Nevertheless, its main competitor, the US, also managed to increase its share by around 10%. Consequentially, Europe lost a huge part of its share from 2000 alongside with Japan, which is almost irrelevant at that point. The massive indebtedness of Evergrande with around $300bn also led to questions on the corporate debt level. Figure 2 shows a comparison of corporate debt expressed in percentages of GDP of different countries from 1991 to 2021. The continued high growth of China, in particular in the last ten years, had to be heavily financed by corporate debt to keep reaching annual growth rates that are similarly high than during 1990s and 2000s. Emerging markets had a similarly strong increase over the years but they did not start at such a high level as China. Other developed economies a relatively moderate increase over the observed period with some minor spikes in times of crises, such as 2000, 2008 and 2020. A second reason for the increased volatility in the market is certainly inflation and the associated concerns with it. In September 2021, the US CPI surged to a 13-year record high with 5.4%, above the 5.3% in August and the expectations for September. The index is very close to the peak of the financial crisis from 2008, while the Core CPI remained at 4% as expected. Yet, the index is still substantially higher than during the global financial crisis of 2008. The general expectations remain as before with potentially further increases until year-end and normalizing inflation rates in 2022. However, the uncertainty in those forecasts has declining compared to earlier in the year which adds instability to the market.
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Figure 1: Top 100 Companies by Market Capitalization in Percent, Source: Eeagli & Barchart.com, October 2021
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Figure 2: Corporate Debt of Companies in Percentages of GDP, Source: Eeagli, Federal Reserve of St. Louis, Economics Research Division, October 2021

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​Figure 3: US Inflation Rates (US Consumer & US Core Consumer) from 1990 to September 2021, Source: Compound & YCharts, October 2021
*|MC_PREVIEW_TEXT|*
RESEARCH PERSPECTIVE VOL. 165
October 2021
Alternative Markets Update October 2021
The collapse of Evergrande last month has brought substantial volatility in the market. However, since the beginning of October, markets seem to recover from their initial shock. This could change again in the coming weeks, as the official default of Evergrande lies ahead if nothing is undertaken. Whether anything will be done by the Chinese government is still unknown. This is of additional importance, as another developer, China Property Group defaulted on 15th October 2021 over $226m in notes and rating agencies have downgraded firms in the Chinese real estate market. The inactivity of the Chinese government may ultimately be a political move, as China tries to restructure its economy and in particular what sectors should be pushed. China may try to focus on the competition with its main competitor, the US, by focusing less on real estate and more on hard technology like artificial intelligence and biotech. The crackdown of tech companies in China may hint at the opposite, although most actions target software-based companies and not necessarily hard-tech companies. Regardless of the recent issues of China, at least from a Western perspective, China has done exceptionally well over the past 20 years as Figure 1 shows. China has increased its power massively with a contribution of more than 10% of the top 100 most valuable companies. Nevertheless, its main competitor, the US, also managed to increase its share by around 10%. Consequentially, Europe lost a huge part of its share from 2000 alongside with Japan, which is almost irrelevant at that point. The massive indebtedness of Evergrande with around $300bn also led to questions on the corporate debt level. Figure 2 shows a comparison of corporate debt expressed in percentages of GDP of different countries from 1991 to 2021. The continued high growth of China, in particular in the last ten years, had to be heavily financed by corporate debt to keep reaching annual growth rates that are similarly high than during 1990s and 2000s. Emerging markets had a similarly strong increase over the years but they did not start at such a high level as China. Other developed economies a relatively moderate increase over the observed period with some minor spikes in times of crises, such as 2000, 2008 and 2020. A second reason for the increased volatility in the market is certainly inflation and the associated concerns with it. In September 2021, the US CPI surged to a 13-year record high with 5.4%, above the 5.3% in August and the expectations for September. The index is very close to the peak of the financial crisis from 2008, while the Core CPI remained at 4% as expected. Yet, the index is still substantially higher than during the global financial crisis of 2008. The general expectations remain as before with potentially further increases until year-end and normalizing inflation rates in 2022. However, the uncertainty in those forecasts has declining compared to earlier in the year which adds instability to the market.
Figure 1: Top 100 Companies by Market Capitalization in Percent, Source: Eeagli & Barchart.com, October 2021
Figure 2: Corporate Debt of Companies in Percentages of GDP, Source: Eeagli, Federal Reserve of St. Louis, Economics Research Division, October 2021
Figure 3: US Inflation Rates (US Consumer & US Core Consumer) from 1990 to September 2021, Source: Compound & YCharts, October 2021
Regardless of the current market uncertainty, the equity market keeps doing well. This is evident from the very hot IPO market at the moment. Figure 4 shows the value in USD stemming from US IPOs over the last 25 years. 2020 has been record year by already – solidly outpacing the dot-com bubble years. However, 2021 is on pace to more than double the deal value compared to 2020.  The enormous surge in IPOs is not only a phenomenon of the US, as in the UK, 2021 also set a new record high with regards to IPO valuations. It is also unlikely that the current wave will stop very abruptly, except if there is a major event happening, as there are several indicators from the private equity market that the market is not slowing down. In 2021, private equity companies paid record premiums for public companies for example. In the US, the SEC is looking into letting ordinary investors invest into private equity which would certainly lead to another substantial inflow in the industry, which would push valuations even higher. In the UK, there is some pressure on doing exits in 2021, as by the end of the year, there may be new tax regulations.
Figure 4: US IPO Issuance in Billion USD from 1997 to 2021 YTD, Source: Compound, WSJ, Dealogic, Renaissance Capital & SPAC Research, October 2021
Other notable movements happened in the cryptocurrency market. Since the beginning of October 2021, Bitcoin (BTC) gained massively in value after moving between $30k and $50k since May 2021. This surge comes shortly after El Salvador’s announcement of accepting BTC as legal tender and in particular closely ahead of the first BTC Futures ETF listing in the US. This will take place on 18th October 2021. BTC reached a value of almost $63k on Sunday, the 17th October 2021. BTC’s market cap is now again solidly over the $1tn mark with $1.15tn. This is the first time in months, when BTC outperformed other most other cryptocurrency assets, as only Binance Coin (BNB) and Polkadot (DOT) achieved a higher return over the past week from the top 20 cryptocurrencies. Ethereum (ETH) is also doing very well and moves around the $3,700 mark since BTC surged again. Despite BTC surpassing the $60k mark again, it is likely that it will fall below it again, as soon as the ETF launched, as investors are likely to take their profits – similarly as it was the case when El Salvador accepted BTC officially as legal tender. That the Bitcoin ETF by ProShares is based on futures and not backed by regular BTC does not cause much excitement. One reason is that the ETF will likely be trading in contango. Therefore, the ETF is largely attractive for sophisticated investors who can arbitrage the future price movements. Another notable event is the direct listing of the second crypto company after Coinbase (COIN). Bakkt (“BKKT”), a subsidiary of the Intercontinental Exchange, is going public on 18th October 2021. Bakkt is a cryptocurrency derivatives exchange and announced its direct listing in January 2021. It goes public through a SPAV – Bakkt merged with VPC Impact Acquisition Holdings for the purpose of the direct listing with an approximate deal value of $2.1bn.
Figure 5: Bitcoin Price from October 2020 to October 2021, Source: Coingecko, October 2021
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