In today’s Exponential Investor

  • Markets take a bath
  • The real reason for all the cold water
  • How bath water in the UK will be heated in the future

Markets, after a long and benign run, stumbled last week and on Monday 20 September.

Most recently, a lot of the focus has been on Evergrande, the Chinese real estate developer.

Indeed, on Monday, that stock was at the centre of a day of market meltdown – so it seemed…

The VIX (a widely followed measure of expected volatility of the S&P 500 Composite in the United States which is sometimes called “the fear index”) leapt up about 30%. Meanwhile, the major global indices all fell by 2-3% in their worst daily falls for months.

For its part, the S&P 500 finally broke downwards through its 50-day moving average, which had been an incredible line of support for so long, as this chart shows:

Source: Koyfin 

No rest for Evergrande’s PR department

Evergrande has widely been seen as a problem for a long time.

China’s property bubble – involving unsustainably high prices and gross over-supply of apartments in particular places – is enormous. It is a symptom of the “GDP growth at all costs policies” that have been followed for much of the last 20 years by the authorities in Beijing, as well as local and provincial governments.

A “build build build” approach does create jobs and demand, but now there are enough vacant dwellings in China to fit the entire populations of Britain or France in, with room to spare.

Evergrande is unlikely to be the only casualty of the bursting of the bubble in the Chinese property sector.

All this is happening at a time that many of the other headlines from Greater China bring bad news. Chinese technology stocks have slumped in price. The authorities in Beijing have clamped down on online gaming and education companies (among others). Geo-political tensions in relation to Hong Kong and Taiwan have been rising. The United States, along with Australia and the UK, have seen fit to form AUKUS, a new defence grouping focused on the Indo-Pacific region, and so on…

Many commentators compare Evergrande with Lehman Brothers, the US investment bank whose collapse was a landmark in the early stages of the global financial crisis of 2008-09.

The US government allowed Lehman to fail. Whether China’s government allows Evergrande to fail remains to be seen.

Presiding over a country which has excess savings, a non-convertible currency and an opaque financial system, the authorities in Beijing are well placed to rescue Evergrande should they really see the need to do so.

A rescue could involve an officially mandated conversion of Evergrande debt into equity. It could involve outright nationalisation of the property developer. Or it could involve “persuading” the big banks to extend new financing to Evergrande. There are many other possibilities.

What really matters, though, is that these subtleties are not well understood by an important community of investors.

No rest for Robinhood and the merry men

I have previously noted that, with higher than normal levels of retail participation in the options markets, thanks to that Prince of Thieves (or rather a commission-free trading platform), Robinhood, the monthly options expiry had the potential to cause carnage in the markets.

It occurs every month, in a window running from about the 18th to the 21st calendar day. See if you can spot that in the eight-month chart of the S&P 500 below…

Source: Koyfin 

(I don’t know why the months get wider as the chart goes along – that’s a Koyfin feature it would seem.)

So Monday’s bad day was perhaps the usual options volatility compounded by the rising fears about Evergrande.

You might say that Robinhood and the merry men (and some women) had struck again…

But it’s very noticeable that it is Evergrande – and not the influence of the options market – has been almost wholly blamed in the mainstream media for the recent dip in global stock markets.

At the time of writing (around 7.40am British Summer Time, Thursday), Asian markets appear to be relaxed about recent developments and the latest (Wednesday 22 September) meeting of the Federal Open Markets Committee (FOMC – the policy-making body of the US Federal Reserve).

The global economy and financial markets do face major challenges. However, dramatic headlines in the mainstream media are not, of themselves, a reason to panic.

No rest for energy providers – and especially if they don’t use fossil fuel

In any event, for every bad news story, there is usually at least one beneficiary.

High natural gas prices through here in the UK – and elsewhere – during the winter will simply reinforce the appeal of renewables.

We are being held hostage by Russian ambitions, as is often the case with the geopolitics of fossil fuels, at a time of other constraints on supply relative to demand.

 And now gas is being priced out of the energy competition.

London will never buy another fossil-fuelled bus again

And China has committed to stop building or financing coal plants in foreign countries, which is enormous news given that it does this far more than anyone else.

As for China’s domestic coal-fired power plants, watch that space…

The trend is only going one way – towards the Green Energy Transition.

All the best,

Kit Winder
Editor, Exponential Investor