How Evergrande fits into our asset allocation outlook

You don’t have to believe that Evergrande’s troubles are the start of a financial crisis in China to think that the risky assets most sensitive to developments there will struggle in the next few years. Even an orderly restructuring of the developer, plus policymakers quickly doing enough to limit distress across the financial system – still the most likely outcome in our view – would probably not prevent much more weakness in construction activity. And in the meantime, other, unrelated, headwinds seem to be building.

23 September 2021

We think China’s equities will continue to struggle

Even if the current concerns around Evergrande abate, we think China’s stock market will continue to underperform many of those elsewhere over the next couple of years.

Drop-In: Evergrande – What are the risks to China and the world? Chief Asia Economist Mark Williams and Senior China Economist Julian Evans-Pritchard will be joined by Senior Markets Economist Oliver Jones to take your questions about the Evergrande situation. They’ll be covering the implications of collapse for China’s financial system and growth outlook, and assessing the global markets fallout. Register here for the 0900 BST/1600 HKT session on Thursday, 23rd September.

22 September 2021

Worrying more about higher inflation

The recent rises in 2-year and 10-year gilt yields to their highest levels since the “dash for cash” at the start of the pandemic have entirely been driven by the investors revising up their expectations for inflation. Indeed, 10-year break-even inflation rates are now at their highest level since the Global Financial Crisis (GFC). Our forecast that RPI inflation will shoot up from 3.8% in August to just over 6.0% by the end of the year suggests that break-even inflation rates may yet rise further. But they should then drop back next year as the bulk of the rise in RPI inflation is reversed. What’s more, our view that the Bank of England will put more weight on the recent weakening in activity than the rise in inflation and won’t raise Bank Rate until 2023 suggests that a big surge in nominal gilt yields is not around the corner.

21 September 2021
More Publications

A few more thoughts on Evergrande and its implications

Further bad news out of China about troubled property developer Evergrande over the weekend has led to a continuation of last week’s risk-off shift across financial markets today. We think three points are worth emphasising.

Making sense of the industrial metals/LatAm equities divergence

The unusual divergence between the GSCI Industrial Metals and MSCI EM Latin America Index recently reflects a couple of developments which we suspect are one-offs. We think that the typical relationship between the two asset classes will reassert itself, albeit with lower metals prices coinciding with MSCI’s index for Latin America falling short of its other regional indices.

Japan’s stock market may not go from strength to strength

We don’t expect the recent surge in Japan’s stock market to last, and think it will make much smaller gains over the next couple of years.

Falling oil prices unlikely to stop EMEA equity gains

Despite the fall in oil prices that we expect over the coming years, we forecast the MSCI Emerging Markets (EM) EMEA Index to make further gains and continue to outperform the broader MSCI EM Index.

Developments in China shake up the outlook

Three key developments in China over the past month or so are worth highlighting, as they feed into our broader asset allocation forecasts for the next couple of years. First, what started as a regulatory crackdown on a handful of sectors seems to have morphed into a broader ideological campaign, with major implications for a wide range of Chinese companies. Second, distressed property developer Evergrande has slid further towards default, heightening concerns about the country’s construction sector in particular, and its financial system more generally. Third, China’s economy generally has shown further signs of slowing.

16 September 2021
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