What the Evergrande crisis means
As the dust settles, investors should watch for opportunities in high-yield Asian debt
The news of China’s largest property developer failing to meet its obligations to its creditors has sent shockwaves through the Asian fixedinterest markets. So exactly what risks and opportunities does this shock bring for investors in Asian high-yield debt?
To understand Evergrande’s fallout, one must understand the backstory to China’s property market. Chinese property developers have enjoyed an exponential rise in their revenues over the past decade from 4.4 trillion yuan (almost $1 trillion) in 2009 to over 16 trillion yuan in 2020. The activity in the main has been focused on developing residential, rather than commercial, real estate.
Property prices as recently as 2019 were growing as much as 10% a year, but slowed to midsingle-digit growth over 2020-2021. House prices have more than doubled since 2015, which is not too dissimilar to the residential increases in developed nations (including Australia) over the same time period.
Many investors observe China’s property market with much scepticism, as though it survives on unchecked economics. There are often other headlines mentioning roughly a quarter of investment properties in urban China sitting vacant, with overall rental yields under 2%. But if you look through the fear-inciting headlines, there are other facts that offset the concerns.
First, China’s urbanisation trend has continued since the 1960s and now sits at 60%. This trend should continue for another 15 years to reach an 80% urbanisation rate, which is roughly where the US is today. Chinese government policy encourages urbanisation, as it is obviously much more cost-effective to service a densely packed population with infrastructure, utilities and civic services. Furthermore, China is a planned economy, so the government tends to plan and layout infrastructure and encourages property investment ahead of the migration trend to newly built cities. There have been many places that have been reported as ghost cities in the past that have gone on to become bustling metropolises, such as Pudong in Shanghai.
Now, back to Evergrande, which is the largest property developer in China, with liabilities totalling about $420 billion. It has more than 1300 property projects on its books across 280 cities as well as other businesses such as food manufacturing and wealth management. The wheels started to come off for Evergrande recently when the Chinese government effectively told the banks to cap lending to dampen house price growth. This meant that buyers found it difficult to get loans and settle on properties, causing Evergrande to suffer a fall in sales activity; cash inflows were insufficient to cover the costs, wages and debt servicing.
This sent a wave of fear among investors holding high-yield dollar-denominated
debt in Asia, which traded down well below par value on the assumption of imminent defaults and insolvencies across the property sector in China. The current sell-off in Asian dollar-denominated highyield debt is the most significant since the previous sell-off in March 2020, which was followed by a massive rally back to normalised levels.
At the time of writing, the interest payments missed by Evergrande have entered a 30-day grace period and if they remain unmet, formal default is a certainty followed by debt restructuring. Given the size of the company and the domino effect it would have on the cost of capital across the property market in China, we see the probability of a contagion as low with the more likely scenario being a debt restructure facilitated by the Chinese government and pain being mostly limited to Evergrande’s bond holders and other creditors.
Max Riaz is an investment manager and director at Banyantree Investment Group, with responsibilities across equity and multi-asset strategies. See banyantreeinvestmentgroup.com.
Gold has a well-earned reputation as a safe-haven asset, a hedge in case the market turns sour. Yet its right to this throne has been threatened by a new kid on the block: cryptocurrency. But are the crypto prophets jumping the gun?
Gold has long been touted for its capital preservation qualities during market downturns and times of inflation. When the market goes down, gold goes up, and when inflation increases, gold increases at a greater rate.
Nor will gold overly weigh down your portfolio when the market is going well. You won’t get the same bang for your buck that equities provide, but you’ll still get some return.
“The overall correlation between gold and equities is very minimal, but if you just look at when the equity market rises, then gold is positively correlated in those environments – it just doesn’t go up as much as equities do,” says Jordan Eliseo, manager of listed products and investment research at the Perth Mint.
Cryptocurrency, such as Bitcoin, has also been touted as an inflation hedge.
“We know that in other countries that suffer from more severe currency inflation or devaluation like Venezuela and Nigeria, people use cryptocurrencies as a store of value,” Kim Grauer , head of research at Chainalysis, told Cointelegraph in August.
However, simply being labelled as a deflationary asset doesn’t necessarily make it so. To be a true hedge, there needs to be a correlation between inflation and cryptocurrency. And at present, there isn’t.
“Right now, we can’t show a statistically significant correlation between inflation in the US and Bitcoin prices, but we know anecdotally that many people invest in Bitcoin as a hedge against inflation,” added Grauer.
Mark Bouris, executive chairman of wealth manager Yellow Brick Road, accepts crypto’s place in the investment world, but stops short of treating it as a safe-haven asset. “I see cryptocurrency as just another asset class, where you can invest with a view towards making a profit,” he says.
Gold, on the other hand, has a history to back up its claim as a defensive hedge against down markets and inflation.
“Gold’s got a lot more history and a much deeper market, including governments, which stockpile gold,” says Bouris.
“Gold has been a standard against which currencies are measured.”
There are several ways investors can gain exposure to gold.
The first is by purchasing physical gold. You can store the gold yourself or you can open a storage account at Perth Mint, which provides the only governmentbacked investment and storage program in the world. Another way to go is to buy an exchange traded fund (ETF) that holds physical gold. These can be categorised as either unallocated gold funds, where the issuer holds the physical gold on your behalf, or unitised allocated gold funds, which are physically backed by gold bullion that is stored by fund managers on behalf of investors.
The Perth Mint Gold ETF (ASX: PMGOLD) is an example of an unallocated gold ETF, while ETFS Physical Gold (GOLD) and BetaShares Gold Bullion – Currency Hedged (QAU) are both allocated gold ETFs.
You can also invest in gold stocks directly. “Gold stocks aren’t just reliant on the gold price,” says Bouris. “It could be that it’s a better gold stock because the company has better management, has more licences or is more successful at finding gold. It has more upside. And often the companies will mine other minerals, so you get some balance in there.”
If you don’t want to pick the stocks yourself, there are a couple of gold miner ETFs. Not only do you get access to the gold price, but also the free diversification that comes with owning ETFs.
VanEck Vectors Gold Miners ETF (GDX) is an unhedged fund exposure to about 50 companies involved in mining gold and silver, while BetaShares Global Gold Miners – Currency Hedged (MNRS) is a hedged fund that invests in about 50 companies engaged in gold, silver or other metal mining.