Market Update:
Hey Big Spender...

  👉 As well as the usual data on markets I provide, one other which should get a mention is the Hang Seng, where many of China’s more Internationally known businesses trade. It’s value fell 6% in September, compounding a quarterly loss of nearly 15% for investors in the Hong Kong market for quarter 3.

Recent months have seen the Chinese tech giants like Ali Baba and Tencent be hit with regulatory constraints seeing share price affected.

 And now we have the story of Evergrande, which in 2018 was the most valuable Real Estate company in the world. The company which has managed to accumulate an incredible US$300 billion of debt has been struggling to make its interest payments, causing all the doomsayers to crawl out of their caves and talk about this being a trigger for the next “crash”,  citing unsubstantiated comparisons to the 2008 US property price crisis.

Not many would have heard of Evergrande before the recent events. Essentially a Real Estate Business with interests in other sectors such as tourism and healthcare, the company is reported to sustain 3.8 million jobs. Real Estate as a sector is responsible for 30% of China’s GDP

Whilst the exact nature of the reasons for the late payment of interest remain unclear, there is belief that if the company is in dire financial straits, a government bail out will be the way forward. The debt that is causing the problem has been accumulated at break neck speed. Urbanisation in China is the key driver for this growth.

Despite Covid, during 2020 over 42 million people left rural China to move to one its growing number and growing in size mega cities. This is more than the population of Canada and just short of the population of Spain.

This was triple the number who made the same migration during 2019 and the trend will continue. So Real Estate giants like Evergrande will have their customers. The Chinese government would have already been more than aware of the situation and my view is a bailout will be smooth and sound and in a few months no one will be talking about it, as China’s successful economic growth story continues.

When comparing urbanisation with developed countries, China at 59% is 18% lower than Germany, 21% lower than the US and 28% lower than Japan, its fellow Asian powerhouse.

If the country catches up with Japan over the next 20 years, the increase in population of these Chinese cities will be greater than the current population of the whole of the United States and Germany combined….so enough demand I feel.

Quarter 4 is historically the best performing in the US as well. Consumer driven events like Thanksgiving and Christmas make it the time to buy for those investors who like a cyclical approach. As Covid seems an afterthought, at least domestically in the US right now with very few formal restrictions, the consumer is cash rich and ready to spend.

Despite the monthly fall, the S&P 500 has a sound footing on three aspects which should be considered: Earnings, Fundamentals and Valuation. With the last round of earnings seeing the highest  percentage increases in over a decade, and the Equity Risk Premium (a measure of valuation) being 3.5% versus a thirty year average of 2.1% – the numbers bode well……