Investors have Evergrande on their minds

Blog
Friday 24th September 2021

Investors have Evergrande on their minds

Blog
Friday 24th September 2021
Written by Chris Lioutas

Markets:

  • Local and global equity markets were a little jittery this week as investors digested news regarding China’s 2nd largest property developer, Evergrande, potentially going under.
  • In local stock news, iron ore miners have been hard hit as the iron ore price continued to fall in light of waning Chinese demand. Chinese steel mills are easing steelmaking following a government demand to curb pollution. The question is now whether this is a temporary or permanent state of play.
  • Transurban and their JV partners are paying $11 billion for the NSW government’s 49% stake in Sydney toll road WestConnex. Transurban will raise new equity at $13 per share to fund their share of the purchase.
  • Canada’s Brookfield Asset Management and Australia’s APA Group are fighting it out to take over electricity operator AusNet. Brookfield had improved their all-cash offer to $2.50 a share whilst APA has since offered $2.60 per share in a mix of cash and shares deal.
  • The oil price rose this week as US supplies continue to dwindle whilst oil production in the Gulf of Mexico hasn’t returned to full production levels in the aftermath of hurricane Ida. Oil demand continues to rise in line with the broader economic recovery globally.

Economics:

  • Payroll jobs fell by 1.3% nationally over the fortnight to 28 August with NSW, VIC, and the ACT seeing the largest falls. Appears to be minimal spill over to other states. The largest quarterly employment losses have been in hospitality and leisure whilst manufacturing has seen a large gain.
  • In a further blow to Victoria’s building industry, the Victorian government has shut down the industry for 2 weeks following recent protests by tradies. The shutdown is projected to cost the state economy $1 billion per week, in addition to other non-monetary costs. 
  • Household spending in August showed that intentions had risen relative to the same month last year, but the pace of improvement has continued to decline from the jump in 1st half of 2021. All categories remained weak, with travel, entertainment, and education spending intentions continuing to fall.
  • The Reserve Bank of Australia’s September board minutes stuck to the script and reiterated their position that the current health policy path has delayed, not derailed, the recovery with an expectation that the economy returns to its pre-Delta path by mid-2022. The bank’s updated economic forecasts will be one to watch.
  • New lending for housing eased in August with housing activity dampened by the lockdowns. The share of fixed rate lending remains high, but below recent peaks, whilst lending for renovations continued to grow at a solid pace. Lending to businesses has lifted over recent months as businesses draw down on existing facilities to support cash flow through lockdowns.
  • The US central bank signalled that it could begin to reduce its bond purchases soon and raise interest rates as early as next year, with the committee evenly split between hawks and doves. Rate rises are still a way off, early next year is highly unlikely, but the comments do show a significant shift in thinking. It's now likely they begin tapering their bond buying (money printing) program before the year is out with the process concluding in the 2nd half of 2022.
  • The Chinese central bank pumped $25.4 billion into the bank system in order to calm market jitters in light of concerns regarding Evergrande’s debt issues.

Politics:

  • The UK won’t bail out failed energy companies and the government expects to see more go under in the coming weeks. Failed energy policy over many years coupled with gas prices marking new record highs. The same higher prices are hitting Europe with governments now taking steps to curb the impact on households with Italy spending 3.5 billion euros to protect consumers, while Spain, France and Greece are also acting to assist their economies.
  • The USA will soon allow entry to most foreign air travellers as long as they’re fully vaccinated against Covid-19. The new policy will apparently take effect in early November according to the White House.
  • The European Union is discussing a possible delay to trade talks with the US amid outrage from France over the cancelled Australian submarine contract in favour of a new defence pact with the US and the UK. Some Southeast Asian nations are also concerned that the new partnership could provoke China. The Chinese are obviously not happy.
  • The Democrat controlled House passed a bill that would suspend the US debt ceiling into December 2022. Republicans have vowed to block it in the Senate. President Biden’s next tranche of stimulus (US$3.5 trillion) needs the debt ceiling raised and needs to raise significant revenue via higher taxes if it’s any chance of getting through. 


Author 

Chris Lioutas, Director, Insight Investment Consultants

Chris holds the position of asset consultant for Maxim Advisors and is a current sitting member of Maxim's investment committee. 

With permission of the author, this article is presented by Maxim Private Clients Pty Ltd ASFL No. 511972

Maxim Private Clients Pty Ltd ABN 47 611 614 398 AFSL No. 511972

Disclaimer: This material has been prepared without considering any potential investor's or clients objectives, financial situation or needs. This article is of a general nature and does not consider the individual circumstances of its recipients. Any information contained within this publication should not be misinterpreted as advice in any way. Please consult your financial advisor should you have any questions or concern