KEY THEMES
Over the past few months, the word “ever” seems to bring more harm than good. Earlier in the year, Egypt had to deal with Ever Given, one of the largest container ships in the world, which blocked the Suez Canal for six days, resulting in delays in global trade and costing Egypt lost revenues that the country had to settle for a compensation with the ship owner. Ever and again, we hear of another “ever” that is impacting global markets: China Evergrande Group, China’s second largest property developer. China Evergrande Group owes the biggest debt burden of any publicly-traded real-estate management or development company in the world. It owes some USD300bn to more than 170 banks and financial institutions. Growing concerns about its ability to honor its debt has triggered a risk-off mode, leading global investors to dump risky assets (e.g. stocks, oil, and bitcoin) and jump into safer ones (e.g. U.S. Treasuries).
The toughest part of the Evergrande story is how it could expose a weakness in the Chinese policy making abilities, or worse, structural weaknesses in the Chinese economy. The Chinese government has been passing sweeping regulations to different aspects of China’s property market, aiming at limiting speculation that had fueled wild price hikes. Among many procedures, the Chinese government limited financing to Chinese property developers, as well as limiting mortgage finance. This in return hindered the selling abilities of Chinese companies, besides posing difficulties to refinance their debts. In addition, building materials prices were soaring, as part of China’s de-carbonization efforts. Some sources hint to a potential government intervention to bail out China Evergrande Group. Incidentally, U.S. futures are showing some sort of a rebound.
Back home, the EGX 30 (-1.6% d/d, -2.6% wtd) and EGX 70 EWI (-2.7% d/d, -6.2% wtd) have endured quite heavy losses yesterday, affected by global turbulence over the possible default of China Evergrande Group. Global equities and risk assets in general had a rough day on Monday, as investors weighed the possibilities of different spillover scenarios to other markets/segments. This of course was coupled with expectations of an imminent tapering by the Fed, further extinguishing enthusiasm for risk assets. That said, we believe we should be secluded from any regional/local financial consequences arising from any default by China Evergrande Group due to lack of exposure. However, the current situation affected Egyptian stock prices, which put a lid on the prices of many high-flying small cap stocks. We believe the negative effect should be limited to thin trading activities, given the weak participation from foreign investors in the local market. However, global woes can still lead to a heightened level of volatility. Furthermore, many individual “recovery” stories in the large cap space should be unfazed by any global jitters, which should create some opportunities when the dust settles.