Market Update 12th November 2021
This week there was more drama from failed Chinese property developer Evergrande, which avoided default at the very last moment. The firm owes in excess of $300bn, with a significant portion owed to funds and investors around the globe. While the solvency of one single company shouldn’t really be headline news, it is merely the canary in the coal mine for a growing problem in China’s property market; with a small chance that this could be the start of a major collapse in a similar vein to the global financial crisis. As many of the banks exposed to Chinese property loans are state-owned banks it is hoped the fall out won’t be as severe.
Elsewhere inflation remains a hot topic as US inflation topped 6% for the first time in 30 years. This has prompted criticism of the US Federal Reserve for letting price rises get out of control, but the data is still dominated by things that could be explained by the pandemic. Used cars, for example, are expensive as rental companies are buying back cars they sold during the pandemic. In the UK and Europe inflation is less advanced.
UK: GDP GROWTH SLOWS AMID IMPROVING RETAIL SALES
UK GDP growth increased in the third quarter of 2021 but at a slower speed than forecast. UK output grew 1.3% in the three months to September, down from the previous 1.5% forecast by the Bank of England following downward revisions to July and August. Growth was also sharply down from 5.5% in the second quarter, as the boost from businesses reopening eased and shortages of goods and workers hindered economic activity. However, GDP growth accelerated towards the end of the quarter, increasing by 0.6% in September, up from 0.2% in August.
Figures in September point towards stronger growth in the fourth quarter. Retail sales figures released in October show sales increased 1.3% and are 6.3% above retail spending in October 2019. This rise is likely to persist into the next quarter as the countdown to Christmas approaches. Stronger retail spending also contributed to positive trading updates from the likes of M&S and Halfords, helping the drive UK equity values up.
US: INFLATION PUTS BIDEN UNDER PRESSURE
US inflation came in higher than markets were expecting, causing a wave of volatility. The Consumer Price Index hit 6.2% for the year to October, up from 5.4% in September, driven partly by rising energy costs. This caused President Biden to declare that curbing energy inflation is now a top priority as Republicans use rising prices to criticise his management of the Covid recovery. Without energy and food costs, core inflation has remained high but stable. At 4.6%, it is 0.1% higher than in June.
The sharp rise in the headline rate has renewed speculation about US interest rate policy. US Treasury yields have risen as investors move out of government bonds. Equities, particularly high-growth tech stocks, also fell, while the US dollar rallied sharply. Higher inflation also means Biden faces the choice of reappointing Jerome Powell as chair of the Federal Reserve or opt for a candidate with a more aggressive approach to raising interest rates to deflect criticism in advance of mid-term Congressional elections next year.
GLOBAL: EVERGRANDE DEBT CONCERNS CONTINUE
Troubled Chinese property developer Evergrande narrowly avoided default again this week. However, widening concerns about the ability of Chinese companies to service their debt has pushed average yields to levels not seen since the financial crisis as investors sell up. With yields on Chinese dollar-denominated high yield bonds around 28%, many companies will face real difficulty refinancing their existing borrowing.
Investor nervousness has caused Chinese investment grade bonds to come under pressure as well. The spread on Chinese investment grade bonds, the additional yield that investors demand for holding risker assets, increased by 8 percentage points this week. However, there are signs that the Chinese government may be about to try and defuse the problem. Chinese state media has reported that a series of rule changes are on the way which should make it easier for developers to access finance. Shares in property developers, including Evergrande, recovered slightly at the end of the week.
If you enjoy reading this weekly update, please feel free to share it with your friends and / or family who may also find the contents of interest, and do not hesitate to contact us if you need any help, information or advice yourself about any of the areas covered this week.
Phil Simmonds LL.B(Hons), MBA, FPFS, Chartered MCSI
Chief Executive Officer | Solicitor (non-practising)
Chartered Wealth Manager | Chartered Financial Planner