Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Monday’s market weakness was attributed to struggling Chinese real estate firm Evergrande as global investors, concerned about systemic finance strain, await the point where government agencies stickhandle a rescue for the sector.
Michael Pettis, finance professor at Peking University’s Guanghua School of Management, discussed the risks at length,
“Evergrande is the most-indebted property developer in the world. Its on-balance-sheet liabilities amount to nearly 2 percent of China’s annual GDP … For the past several years, Chinese regulators have worked hard—if unsuccessfully—to reduce the economy’s overreliance on debt … Borrowing has enabled the property sector to become one of the main engines of economic activity for the Chinese economy, accounting for as much as 25 percent of the country’s GDP … Chinese regulators have decided to have a showdown with creditors over Evergrande. By convincing lenders that they will no longer stand behind large Chinese borrowers, they are trying to transform the country’s financial system by making Chinese lenders more reluctant to fund nonproductive investment projects. … China’s ability to achieve politically determined GDP growth targets requires moral hazard, and the country’s financial regulators cannot eliminate moral hazard until Beijing scraps the growth target and allows growth to fall to whatever underlying rate the economy can accommodate … By my estimates, high-quality growth has probably accounted for barely half of China’s GDP growth rate in recent years.”
Mr. Pettis expects government measures will be announced to contain financial distress and losses for retail investors, but officials will be conflicted about it.
“What Does Evergrande Meltdown Mean for China?” – Carnegie Endowment for International Peace
“Why China’s Evergrande is causing anxiety in global markets with the possibility of a default on debt” - Globe Investor
“Is Evergrande really a ‘Lehman Moment’?” – Bloomberg
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BMO economist Erik Johnson detailed Canada’s ‘Carpocalypse’,
“North American auto production disappointed in August most ways you can slice it. Year-to-date production is down 20% versus 2019 levels. The 12-month moving sum is similarly heading in the wrong direction (see chart). Monthly production fell18% year-over-year, highlighted by Canada having the worst month in seasonally adjusted terms going back to the late-1980s (other than April and May 2020). While production in Mexico and the U.S. has surpassed 2020 levels (for now), it has slumped 13% in Canada or 40% versus 2019. With many automakers extending production cuts into September, it doesn’t look like the global chip shortage will end anytime soon.”
“@SBarlow_ROB BMO on the ‘Canadian Carpocalypse’” – (research excerpt, chart) Twitter
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CIBC analyst Jin Yan provided some surprising statistics in Canadian Investor Home Bias Is Fading ,
“Canadian investors have typically favored domestic equities. Though the commitment to Canadian equities has fallen by 10% over the past five years, investors still devote 30% of portfolios to Canadian equities compared to only a 3% weighting in global indices. Furthermore, Information Technology is roughly underweight 20% compared to global benchmarks … Today, Canadian investors have more U.S. than Canadian equity holdings and likely own almost as many non-North American equities. This has changed substantially over the past five years, significantly reducing home country bias. From a sector perspective, the major underweight vis-à-vis global indices is in Information Technology, Health Care, Consumer Discretionary and Communications. Clearly, the shortfall is most extreme in large global technology firms.”
“@SBarlow_ROB CIBC: “Canadian investors have more U.S. than Canadian equity holdings”” – (research excerpt) Twitter
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Newsletter: “Fourteen ‘moonshot’ investing ideas” – Globe Investor
Diversion: “Photos: A Destructive Eruption on the Canary Islands” – The Atlantic
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Scott Barlow