ALTERNATIVE MARKETS UPDATE mid 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

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​Figure 3: US Inflation Rates (US Consumer & US Core Consumer) from 1990 to September 2021, Source: Compound & YCharts, October 2021

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