Today the HSI dropped close to 1,000 points today intra-day. Worries about the Evergrande situation back in China created some panic in the market. After the index has pulled back substantially from the last high of around 31,200, there is bound to be margin calls which contributed to the index falling further.
The Evergrande saga has definitely created an increase in systemic risks as other sectors of the economy might be dragged into it. As of now, there is still uncertainties surrounding this issue and we know, the market hates uncertainties. We see that been reflected in the market volatility seen these few weeks.
I have attached a few articles of Evergrande issues below:
Evergrande begins repaying wealth product investors with property.
PBOC Injects $14 Billion as Evergrande Debt Woes Roil Market.
OIR: Market Pulse – China Evergrande Group
My Views:
There is a possibility of a major stock market reaction if Evergrande fails in its debt obligation, as the failure will create a domino effect on the Chinese economy. In view of this, the Chinese Government has started to request that the other developers to help Evergrande tide over its liquidity crunch.
Since fellow Shenzhen-based peer Kaisa Group became the first Chinese developer to default on a dollar-denominated debt, a stream of firms including Macrolink, China Fortune Land, Yida China, Tahoe Group and Oceanwide Holdings have followed suit.
A number of downgrades by rating agencies did not help as well.
Personally, i would not go bottom fishing at this moment of uncertainties, though there is a high probability that the Chinese Government will avoid a full scale uncontrolled failure of Evergrande. At this stage of economic development, it would be detrimental for that to happen.
But we could not discount the risks caused by a potential failure. For those who are already in positions, i would not suggesting cutting them as well as some brights spots are observed. These include low interest rates environment, ample liquidity in the market (Weekend sales of properties in HK was positive with units snapped up), and a supportive government.
Valuation of the shares are heavily discounted as a result of fear and margin calls. But I would suggesting avoiding property developers, banks and insurance companies for now.
For the time being, I will be monitoring the market closely and update readers in the quickest time possible.