Equity markets struggled during September, erasing much of the gains from the prior month. Fears of a slowing global economy, tightening monetary policy and concerns about the Chinese property market all contributed. Within fixed income, volatility returned as central bankers began to guide towards interest rate rises and tapering of quantitative easing earlier than previously expected, leading to rising yields and falling prices.
China’s Evergrande group, which holds the unenviable title of the world’s most indebted property company, caused significant concern in markets over the month. The company, which has over $300bn in debt, entered a severe liquidity crisis and was unable to pay a regular coupon payment in the month. While the default on such a large amount of debt has primary implications, there are now growing question marks over whether the Chinese property market has overheated and demand is now waning, as well as the level of contagion onto other property companies and potentially the financial sector. While many are confident that with the control the Chinese authorities have, they can manage the crisis, the size of the property market and the dependence of the Chinese economy on it, may prove too burdensome.
The issues with Evergrande have compounded existing market concerns over China’s regulatory interventions into a range of industries. The authorities have been looking to address growing inequality and uneven growth by directly and indirectly targeting large companies in key sectors.From a peak in February, Asian equities are now down over 13% and are lower year to date. This has led to significant underperformance relative to developed market equities.
Following a period of relative calm, fixed income markets were shaken by renewed focus on Central Bank guidance. News flow following regular monetary policy meetings is showing a clear direction towards earlier tightening, be that through higher interest rates or the tapering of quantitative easing. The impact of this on the bond market was felt across all durations, although short to mid duration issues saw the largest rise in yields. With inflation continuing to rise and cost pressures building, central banks will be increasingly pressured to withdraw the exceptionally loose policies that are currently in place.
While economic growth is still strong, the initial boost from unlocking economies is now in the past. Slowing growth in GDP and weaker company earnings are now likely to make headlines although these can be easily anticipated following a period of such exceptional growth. This may lead to shorter term volatility, however, with few alternative options, any significant falls are likely to lead to buying pressure.