Monday, September 27, 2021
In Canada, people lined up at the polls for what I’ve been calling the “election to nowhere”. $610 million dollars and our political landscape remains pretty much the same. Canada’s election was important for market sentiment here the Great White North, but the big topic in financial markets last week emerged from China. Last week, the vast majority had never even heard of Evergrande, and now it’s all anyone can talk about.
The cheat notes on this are pretty straightforward. Evergrande is a Chinese company that built a real estate empire, but used debt to finance their expansion. They sold millions (yes, millions) of apartments to China’s growing middle class since being founded by Xu Jiayin, one of the wealthiest men in the country. It boasts over 200,000 employees. For years their model worked: borrow money, build property, sell before it is complete, use the proceeds to buy more property, borrow more, build. And so on. It’s a strategy that works, until it doesn’t. And that’s when the lenders come calling asking for the company to repay some of its $300 billion in debt.
And anytime a $300 billion stone is dropped in financial waters, there will be waves and ripples that crash on foreign shores. It underscores how interconnected the global economy truly is. If a property developer – even a major one like Evergrande – defaults on its loans it will impact investors around the globe, even if the only impact is a rise in uncertainty about markets in these uncertain times.
The Wall Street Journal is reporting that authorities in China have asked local governments to prepare for the possible downfall of the company. What that means for bondholders remains to be seen. Some are calling this the Chinese equivalent of the collapse of US Lehman Brothers in 2008. At close of markets September 24, the Chinese economy as measured by an ETF Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR) was only off 5.64% YTD.(1)
In Europe, higher energy prices are pushing up fears of gas shortages in the winter, which is resulting in higher prices for all other sources of energy, including alternatives. It will be something to keep an eye on as inflation talk continues to percolate around the world.
With these events, the S&P500 lost some ground last week, declining 2.24% for the period from September 20 – September 24. It has now returned negative 1.52% so far month-to-date in September.(2)
The September 26 German elections should prove interesting. The Social Democrats (SPD) had been surging in the polls, but in reality, they are in a statistical tie with the Christian Democratic Party (CDU) -- both are averaging around 25% popular support. Germany awards seats based on a proportion of the overall vote earned, which means they are almost certainly headed for some form of coalition government.
In the US, it took a fiscal showdown to push COVID off of the front page, if only temporarily. This seems to be happening with some degree of regularlity – the US has a September 30 deadline to fund their government or raise their debt ceiling. Time and again Congress seems to approve this measure, but not without significant uncertainty and (often) temporarily shutdown to some government services. In my opinion it’s hard to argue with fiscal conservatives on this one – the government is spending an awful lot of money at the moment. The debt ceiling is a limit that the Congress places on the amount of debt the federal government can incur. However, since being enacted in the early part of the 20th century to help fund the cost of two World Wars, the ceiling has been raised an astounding 98 times. Not much of a limit on spending if you keep raising it every time you get close to banging your head against it.
During the pandemic, one of the best performing sectors for investors in the US economy has been in consumer discretionary stocks. This sector is led by household brand names like Amazon, Home Depot and Lowes. It is up over 82.57% between March 30, 2020 and September 24, 2021. (3) And it makes sense. Everyone was staying home and ordering goods online. Travel was down, so consumers were spending money for home repairs rather than vacations. It will be interesting to see if the “order online” pattern continues as economies begin to open up in North America, or if people are anxious to get back out to supporting their small, local retailers.
I spent two days this week in the province of Quebec. Not only does it give me an excuse to practice my French, it was my first introduction to a vaccine passport system. One restaurant owner I spoke with was delighted that vaccines were mandatory – it meant she didn’t have to argue with, police or turn away unvaccinated customers. No shirt, no shoes, no shots, no service. I’m not saying it’s the only way to do things, but at least for that business owner it worked.
The opinions expressed are those of Craig Swistun and not necessarily those of Raymond James Investment Counsel which is a subsidiary of Raymond James Ltd. Statistics and factual data and other information presented are from sources believed to be reliable but their accuracy cannot be guaranteed. It is furnished on the basis and understanding that Raymond James is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. Raymond James advisors are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters.