Category: Corporate

ALTERNATIVE MARKETS UPDATE mid october 2021

18/10/2021

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

alternative markets update end september 2021

26/9/2021

The most noteworthy event in September 2021 was probably the apparent collapse of Evergrande, one of the largest real estate companies in China, whose status is currently unknown. On Thursday, 16th September 2021, Evergrande issued a statement that it will not be able to repay the outstanding interest payments that day. Following this announcement, the financial market was in substantial stress. Equity markets all around the world lost a few percentage points and volatility spiked. Bond trading was under pressure as well, as Evergrande’s bonds were downgraded and frozen from trading. It sometimes was already referred to the next “Lehman Brothers” case. The volatility the stock has seen since is tremendous, as it lost nearly 80% in the first few days after the announcement. It seemed as though the situation had stabilized, but since not all due payments were paid on Friday, 24th September 2021, the status is unknown. If nothing else happens, which is highly unlikely, the company would enter a grace period following bankruptcy. There are three critical features involved in Evergrande. Firstly, China and Chinese people are heavily engaged with the company, as the company has sold many buildings already without having built them yet. A default would cause huge issues for the affected people. Secondly, many companies are frequently doing business with Evergrande, in particular construction, design and other suppliers, could also face bankruptcy alongside Evergrande. Lastly, the collapse of Evergrande would pose a substantial risk to the financial system of China. The latter one is in particular difficult, as the company has outstanding debt at more than 250 banks, which could put additional pressure on China’s ability to offer cheap debt, which is necessary to maintain growth level. Moreover, it does not make a China a more appealing place to invest for foreign investors, which were already on the decline since the recent developments

alternative markets update h2 2021 outlook

11/8/2021

The macroeconomic environment will largely drive the market in H2 2021, which itself is based on significant degree how Covid-19 will evolve in the near future. With regards to the pandemic, the key questions are how the number of vaccinations evolve going forward, in particular as developed economies no longer have shortages of vaccines, but rather a declining number of people that want to get vaccinated. A crucial point is whether herd immunity can be achieved, either by being vaccinated or having had the virus. Another important point is how long the vaccine will last, as the cases of vaccinated people contracting the virus rises. Luckily, the symptoms seem to be minor. Probably even more important is whether new strains of the virus emerge that completely bypass vaccinations and essentially setting the world back to March 2020. The latter scenario seems less likely but should be considered to some degree. In a non-negative scenario, US inflation is likely to drop towards the end of the year with expectations around 3%. For the next years, it is expected that US inflation will remain between 2% and 3%, following the change in the FED’s inflation target of being 2% in the long-term instead of capping inflation at 2%. Thus, it is unlikely that inflation will drop below 2% for quite some time. In the EU, the inflation outlook is lower compared to the US, as the ECB expects inflation to rise to around 2.6% in Q4 2021. In 2022 and 2023, inflation is expected to remain around 1.5%. Furthermore, the FED and ECB also hinted at possibly putting more emphasis on employment instead of inflation going forward. This suggests gold being well positioned in the current market. As of July 2021, gold is almost back at its average in 2021 of $1800 per ounce. Despite being at a relatively high level historically, gold seems attractive with surging inflation and short-term interest rates being very close to 0%. Yet gold’s record high of more than $2000 per ounce lies back almost a year, at a point in which inflation was at 1% and not a concern for many. Since May 2021, inflows in gold ETFs are positive again albeit a bit sluggish. This is remarkable as previously, there were mostly only net outflows. Currently, the global gold AuM is at $214bn. Equities, in particular in the US, have experienced a great 2021, as shown in Figure 1. The S&P 500 is trading very close to its record high of around 4,450. During 2021, expectations for the S&P 500 level were adjusted multiple times. At the end of 2020, when the S&P 500 was 3,700, moderate expectations were around 3,900, while optimistic scenarios targeted 4,300. Yet, all those expectations were already surpassed in the low-interest rate environment, monetary stimulus and increased corporate earnings due to the recovery of the economy. Goldman Sachs has updated its target for the S&P 500 to 4,700 at the end of 2021. Contrarily, Chinese tech companies have suffered in July with the worst month since the financial crisis in 2008. Investors feared the crackdown of Chinese regulators on tech companies. Figure 2 shows valuations of Chinese companies listed in Hong Kong and in the US. Not only, are Chinese tech companies strongly undervalued compared to US tech stocks. Furthermore, Chinese tech companies listed in the US are even stronger undervalued, as very few even reach a multiple of 5, as shown in Figure 2.