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SA shares slide, as default risks haunt Evergrande

Commodity prices are tumbling dramatically, but don’t panic: Wayne McCurrie.
Image: Waldo Swiegers, Bloomberg

Emerging market shares sank 1.3% on Monday, set for their steepest decline in a month, with a 3.3% dive in Hong Kong leading declines as China Evergrande plumbed 11-year lows starting down a fast approaching debt payment deadline.

Fears of a trickle-down effect from indebted Evergrande’s likely default as well as caution ahead of several central bank meetings, including the United States, Turkey and South Africa, weighed on sentiment, pushing investors towards the safety of the dollar.

“For as long as this situation of uncertainty lasts we’re going to see higher volatility on concerns this may spread and over maybe compromise economic recovery in China which has already been slowing,” said Cristian Maggio, head of EM strategy at TD Securities.

He said the risk of stimulus tapering by the Fed raises the chances of in higher rate in the dollar, and compounded with the price volatility and deterioration in growth outlook in China, makes for a perfect storm for EM.

MSCI’s index of EM currencies fell 1.44% to hit a three-week low, with rand’s 1.52% drop to 14.795 leading the pack. The currency has lost about 5% since last Monday.

Rand vs US dollar over a week

By 11:09 the JSE All Share was down 2.89% to 61049.95, while the Top 40 was down 3.10% to 54851.65.

JSE Alsi & Top 40 performance over a week

Wayne McCurrie, portfolio manager at FNB Wealth & Investments, told Moneyweb: “There seems to be a mini panic going on in China regarding the property company called Evergrande – they are in deep debt and may default on their loans – so the Hong Kong markets are down quite strongly. The Chinese markets are closed…but the Hong Kong markets are down significantly on this concern around [Evergrande].”
He remarks that even more important for the South African markets is the fact that commodity prices are tumbling quite dramatically.
“Iron ore is below a hundred dollars and all commodity prices are falling – so that’s the biggest single negative influence and we are also seeing that in the rand,” says McCurrie.
By late morning on Monday, a number of commodity shares were among the bottom 5 of the JSE’s top 100 shares, including: Anglo American (down 8.51%), African Rainbow Minerals (-7.76), and Kumba Iron Ore (-5.52%).
McCurrie said we can expect the negative downturn to continue for a while but it would be a far more subdued downcycle.
“My guess is this down cycle will continue for about a year. But having said that, the majority of the fall has happened and secondly, this down cycle is going to be a lot milder than previous downcycles. So now is not the time to panic, the time to panic should have been three months ago when iron ore was still at $220/ton.”
He added that commodity shares are starting to approach buying territory.

Emerging markets

Asian currencies are expected to be impacted by a possible meltdown at Evergrande as investors rethink their bullish bets on the yuan.

After logging its worst week in a month, an index of EM stocks extended losses and is now down about 13% from 2021 peaks hit in February. Markets in China and South Korea were closed for a holiday.

Following a bruising session in Asia, bourses in Turkey, Russia, South Africa , Poland and Saudi Arabia all slumped between 1.4% and 2.4%.

Russian shares were set for the worst session in a month, and falling oil prices deepened the rouble’s losses.

Over the weekend, Russia’s ruling United Russia party retained its parliamentary majority in elections, as expected, but lost over a tenth of its support, partial results showed.

Gazprom lost almost 1% after a group of European Parliament lawmakers asked the European Commission to probe Gazprom’s role in soaring European gas prices.

Turkey’s lira dropped to an over 10-week low, with all eyes on the central bank which has started setting the stage for an interest rate cut amid political pressure, despite surging inflation.

Botswana’s pula currency hit a three-week high after ratings agency S&P on Friday revised its outlook to ‘stable’ from ‘negative’ saying an economic rebound, supported by a strong diamond sector recovery, will lead to an improvement in fiscal and external performance.

COMMENTS   17

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Easy. Move to Bitcoin.

BTC is down 7.7% in the past 24H hardly a safe heaven atm

@PJJ

There is no ‘safe haven’

Having said that, would rather be holding Btc then the worthless fiat helicopter money they printing Zimbabwe style.

And we all know how that one ended.

“MSCI’s index of EM currencies fell xx% to hit a three-week low”, was it supposed to pull a number into that “xx%”?

A moving target?

Perhaps it is part of an add campaign for Knorrox Xtra Xtra Strong

It means that it is 1 notch above a porn rating. The f word. We have got many problems but we are not XXX yet!

It is an insignificant number, this provoked some anger with with the author.

There are thousands of Evergrandes waiting to topple in the US, the UK and the EU.

It’s only just begun.

There is a fundamental explanation and reason for every technical correction. When the biggest economies have a license to prop up asset values by devaluing their currencies, every correction is a buying opportunity. A 10% to 15% correction will be healthy, and good for longer-term market stability.

Your wish shall be the FEDs command. Within a couple percent. The FEDs bubble is teflon coated.

Around 43% above the 200 period Moving Average on the S&P500 Weekly graph.

Very seldom at these high levels. It will correct to more normal levels at some stage.

With September and October often being weak months lots can happen.

Have some dry powder.

Assuming your retirement funds are maxxed out in terms of foreign allocations what would be a good allocation split of SA equities vs SA Bonds on the balance of the funds?

Would 50/50% give the best risk reward scenario looking at a 5 year horizon?

let’s see if Evergrande is too big to fail.

We have gotten too used to big numbers expressed in alphabetic terms.

Evergrande is a $300,000,000,000 default. That is about three times Long Term Capital’s oops from the 80’s.

Ten times Eskom total debt – poof. So easy, just a few more journal entries, bygones, nothing to see.

This is an interesting comparison. The amount of damage that emanates from such a financial shock depends on the size of bankruptcy relative to the size of the money supply. The bankruptcy and the debt defaults lead to a contraction in the money supply and this drives the revaluation of asset prices in terms of the shrinking supply of credit. The nominal prices of shares go down as the purchasing power of money rises.

The US M2 Money Stock is currently 5 times larger than at the time of the LTCM event. This implies that the severity of shock resulting from the Evergrande bankruptcy should be about half the size of the LTCM disaster in relative terms. We are not even counting the effect of the growth in the Chinese money supply.

Anyway, they will simply increase the money supply to absorb the losses.

“Anyway, they will simply increase the money supply to absorb the losses.”

And herein lies the problem.

This perversion of just ‘firing up the printing presses’ – soon they’ll be using the toilet paper factories to print both and save on rent !

Hyper – inflation anyone ?

The living proof is Zimbabwe.

Ding ding.

Still no one seeing the red flags with all this ????

End of comments.

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