stock market: Watch out for excesses, that’s what will eventually
In line with the above quote of Sir John Templeton, the current bull market was also born in the midst of stark pessimism owing to the Covid crisis some 18 months back. Since then, global financial markets appear to have embarked on a one-way journey in which there has been no looking back.
But while this excess liquidity-fuelled bull market is on, cracks seem to be developing both on Wall Street as well as in real economies.
Excesses & Incidents
Excesses have always invited pain in the stock market. In March-April 2021, one of Wall Street’s biggest hedge fund managers, Bill Hwang, went bust after his fund Archegos Capital lost $20 billion in just two days. That had to do with excessive borrowing. That incident substantially bruised and battered the wealth management division of Credit Suisse.
In Beijing, real estate giant Evergrande is navigating a similar problem of excesses. The firm, which had a humble beginning in the mid-1990s, emerged the largest property developer in China by selling apartments to upper and middle income groups, perhaps on the back of easy money that fuelled its growth. By 2018, it was regarded as the most valued property developer in the world and ranked 122th in the Fortune 500 list of companies.
But as China started a crackdown on shadow lenders and made attempts to cool off the rapid rise in property prices, Evergrande found itself on the brink of collapse and that triggered panic in the financial markets globally. Its deadline of September 24 for coupon payment of $80 million passed off quietly without any update from the company as markets globally braced for a hard landing.
So, can Evergrande prove to be the proverbial canary in the coal mine for the ongoing bull run? Archegos Capital’s default was substantial, with a message for the financial markets that it can be considered a case of a rogue speculator and written off as one-off event. But Evergrande’s can’t be taken that way. This developer has huge debt of $300 billion and its investments in the real estate sector are estimated to be around 2% of total investments in China.
The contribution of the real estate sector to China’s economy is 29%. Over the past few years, Chinese households were encouraged to save more wealth in the real estate sector, which now holds 75% of the total household savings.
A recent research paper published by Kenneth Rogoff, Professor at Harvard University, and co-authored by Yuancheng Yang, observes that as the Chinese real estate sector is huge, a significant slowdown in home prices can substantially impact China’s overall growth even in the absence of financial crisis.
Interestingly, the same research paper points out that the home price ratio to income is far higher in the Chinese cities compared with global hot spots like New York, London, Tokyo.
Considering that Evergrande has outstanding under-construction…
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