It has been a frustrating start to the week as equity markets opened down heavily on speculation that Evergrande, a highly indebted Chinese property developer, would default on its debt repayments.
While we appreciate financial markets could be worried about contagion arising from a potential collapse of Evergrande, we believe that financial markets have overreacted.
The troubles at Evergrande have been steadily building for months and we don’t believe that there was anything new over the weekend to cause equity markets to fall on Monday.
Additionally, while we suspect that the Chinese authorities will step in with a bailout, an Evergrande collapse, while messy, would be nothing like the implosion we saw when Lehman Brothers collapsed in 2008.
However, annoyingly Evergrande has diverted attention from the numerous central bank monetary policy meetings we have this week (including those from the Fed, BoJ and the BoE) and the global spike in energy prices.
In fact, we are more concerned about rising energy prices than Evergrande: the rise in energy prices will soon feed into higher inflation data readings which could prompt policymakers, who are already itching to tighten monetary policy, to increase interest rates quicker and more aggressively than previously indicated – and we believe that this would be a policy error as the rise in energy prices will reduce our disposable income and therefore an increase in interest rates could impact a household’s financial stability, especially in the UK given the planned increase in National Insurance rates.
Investment Management Team