What happened with the markets today

September 20, 2021

Fears that the liquidity crisis faced by Chinese property developer Evergrande could exert a contagion effect on the global economy shook equity markets on Monday. At its low point, the S&P 500 was down 2.7%, which would have made it the worst day since October 28, 2020. A rebound in the last 30 minutes of the session, however, limited the daily losses to 1.7%.

Chinese companies and their influence on our markets

News of Evergrande's financial difficulties and excessive debt have been circulating for more than a year. The situation has steadily deteriorated over the period, leading the markets to discount a high probability of default on the company's impending financial obligations, including a payment of approximately US$83 million due this Thursday.

Last year, the Chinese government issued a series of new rules (often referred to as the three red lines) aimed at curbing the chronic problem of over-leverage in its real estate sector, of which Evergrande is the poster child. As such, one can understand why policymakers are in no hurry to launch a massive bailout operation, presumably seeking to make an example out of the most indebted real estate promoter on the planet.

However, we are likely approaching the maximum level of the financial stress the government is willing to tolerate Evergrande's stock is down 85% in 2021 – before using its vast resources to contain damages. That doesn't mean the company won't default on some of its obligations, but the government simply cannot afford to let Evergrande collapse and threaten the survival of the entire real estate sector, which accounts for nearly 30% of its economy.

The situation remains uncertain and will require continued monitoring in the near term. Nevertheless, it is important to keep things in perspective. With the almost uninterrupted rise of stock markets since the beginning of the year – the S&P 500 has not suffered a 5% decline for more than 10 months – we shouldn't be surprised to see markets react more strongly to any bad news. Yet, for now, the Evergrande situation does not materially change our economic outlook which already incorporates slower growth and a more volatile backdrop.

- The Creed Capital Management Team

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