Savage September sees significant inventory losses in East Asia

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It was a wild September. East Asian markets followed the lead of their US counterparts and sold strongly last week. Chinese and Southeast Asian equities, however, were surprisingly strong.

In Tokyo, the Topix fell 2.3% on Friday, bringing its losses this week to 5.3%, while the Nikkei 225 fell 2.5% for the day. That left the Topix, which represents all of the major stocks traded on the Tokyo Stock Exchange, slightly in the dark for the month with a gain of 0.1%.

The massive sale spread across the Sea of ​​Japan. South Korea’s main benchmark, Kospi, fell 1.6% on Friday. This leaves the Seoul market at 5.8% month-on-month losses.

Taiwan’s Taiex index fell 2.2% on Friday and lost 5.2% over the past month. With strong influence from chipmakers and other electronics makers, the Taiwanese market shares many similarities with that of South Korea.

Korea and Taiwan were the stars of the first quarter of this year. They had some of the biggest sales in September as doubts about global growth hurt their export-oriented large caps.

Australia posted figures similar to losses in East Asia. The S & P / ASX 200 Index fell 2.0% on Friday, leaving it with a loss of 4.5% last month. Australian stocks are now at a similar level to early June. Banks and mining stocks, two mainstays of Sydney, were the main drag on Friday, but just about all stocks lost ground.

Markets are closed here on Friday in mainland China and Hong Kong, a public holiday that recognizes the founding of the People’s Republic of China on October 1, 1949.

The Hong Kong international market also suffered in September. The benchmark Hang Seng index fell 5.6% last month.

Mainland Chinese markets were more isolated. The CSI 300 was essentially flat, very narrowly in the red with a loss of 0.06% for September.

In Southeast Asia and other parts of the continent, the picture is more mixed. The vaccination campaign in Southeast Asia has finally taken off, leading to gains in the Indonesian, Filipino and Vietnamese markets. Singapore stocks lost just 1.1% in September, and the Straits Times Index still retains much of the ground gained at the start of the second quarter.

Seeing the mainland’s stocks hold on is a surprise, as China struggles to keep the lights on. A tightening in coal supply and prices has resulted in a series of power cuts in northern China. The crisis worsens in its second week, with some factories ordered to stop production on certain days. The stock of coal, used to generate 56% of Chinese electricity, is at its lowest. Power rationing is spreading from the industrial northeast and power outages are now affecting 20 of China’s 23 provinces, extending to southern China.

China will have a “Golden Week” holiday next week, and the Shanghai and Shenzhen stock exchanges are closed until next Friday. We will see if the one week break improves the energy situation.

And then there is Evergrande …

The stability of Chinese stocks is also surprising given the frenzy around China Evergrande Group (HK: 3333 and EGRNY).

Evergrande’s 79% drop this year is felt most directly in Hong Kong, where it and many of China’s biggest real estate developers are listed. But analysts have assessed whether the company’s $ 305 billion debt poses a systemic risk to the continent’s financial system.

Evergrande, unlike the rest of the world, has had a pretty good week. Despite missing payments to international bond holders, the company’s penny stocks have gained 27.7% since the close last Friday. Despite being in technical default on two offshore bonds in 30 days, struggling US debt funds have bought his bonds, an extremely risky call for some sort of managed restructuring.

U.S. distress specialists Saba Capital Management, Redwood Capital Management, Silver Point Capital, Marathon Asset Management and Contrarian Capital Management have bought Evergrande offshore bonds in recent weeks, on Financial Time reported here Friday.

Evergrande missed an $ 83.5 million payment on a bond last Friday, but trading in the bond rose this week, reaching $ 124 million on Wednesday. Evergrande’s bond maturing in March 2022 is trading today at 24 cents to the dollar. An investor told the FT that he bought an onshore note issued by Evergrande’s main operating subsidiary, Hengda Real Estate, at 16 cents on the dollar and that he expects to almost double his money over the years. next months. He thinks a low-cost tender or debt-for-equity swap is likely.

It is extremely daring. But if you are a struggling investor, this is what you do. Most conventional and conservative institutional investors such as pension funds and insurers sell and do their utmost to insulate their portfolios from Evergrande risk.

As a foreign investor, betting on the Beijing government to bail you out is very unwise. The Chinese Communist Party has demonstrated through sudden and decimating policy changes in the market that it does not care about the value being erased from international stocks and bonds issued by Chinese companies. However, it cares a great deal about civil unrest as an unelected party that seized power in a revolution itself, 72 years ago to date.

The Chinese Communist Party will do everything in its power to ensure that potential buyers angry at struggling Chinese developers – a growing list – are left with apartments to buy. This will likely force Evergrande and others to sell projects to state-backed developers. Where such a sale of assets leaves international bondholders and equity investors is a conundrum. These assets could be wiped out. National creditors and bondholders will certainly have priority.

The Central People’s Bank of China and China’s banking and insurance regulator called a meeting on real estate financing on Wednesday. Representatives from the Chinese Ministry of Housing, the stock market watchdog and 24 major banks were also present. Bankers were ordered to maintain the “continuity and stability” of the real estate financial system, and financial companies were ordered to work with local governments to prevent speculation while stabilizing land and house prices.

Chris Wood, in his GREED & Fear report, says policy easing “surely comes sooner or later”, possibly in the form of telling banks they can lend more money to the industry. Wood, global head of equities at Jefferies, notes that while real estate developers are struggling to deleverage and fall under China’s ‘three red lines’, Chinese banks are not currently capping the amount regulators allow companies financial loans to real estate. Big banks can allocate 40% of loans to real estate, a figure that now stands at 27.4% of all bank loans.

Much of the bad news is already embedded in Chinese equities. The CSI 300 is down 7.6% in 2021, as most Asian markets are still up for the year despite the September sell-off.

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