What does Evergrande’s default mean for Chinese investment landscape?

ESG Zenith Array evergrande Array

21 October 2021
| By Oksana Patron |
image
image
expand image

Active management and the ability to assess the environmental, social, governance (ESG) risks are particularly important when investing in politically charged economies, according to Zenith Investments Partners.

The firm’s investment consultant, Calvin Richardson, said it was demonstrated by a ‘controlled demolition’ of China’s second largest developer, Evergrande, which managers had intentionally avoided for years.

“We definitely have not subscribed to the notion that China has become un-investable but we just think you need to be extremely selective in positioning and employ high quality active management to navigate pockets of volatility but you also want to be able to take advantage of mispriced opportunities where the market sentiment,” Richardson said.

“The downfall of Evergrande has really emphasised the importance of active management as Evergrande represented disproportionately large weighting in high yield indices so what you have is the most indebted issuers are the largest constituents in these passive allocations.”

Richardson noted Evergrande’s valuation metrics had been quite poor for some time and, additionally, the company progressively contravened the all the ‘three red lines rules’ introduced last year by the government to improve the financial health of the real estate sector, which in result impacted its further access to financing for their projects.

“We first saw that domino falling first in September and that was when the market really started to take notice that Evergrande is experiencing this acute liquidity stresses. And that was when it became clear that they would likely default on their debt repayments,” he added.

However, at the same time, there were a number of other developers in China which were in the similarly precarious scenario and they were also struggling to meet their debt repayments.

According to Zenith, which portfolios held no exposure to Evergrande’s debt or equity securities, the headline risk was that the credit markets would seize up.

Although there were some mild contagion effects, with lenders, insurers, and suppliers most exposed to Evergrande understandably suffering the most, and the domestic situation in China appearing highly volatile with property prices most exposed to asset deflation, the likelihood of the Chinese Communist Party (CCP) allowing this to transpire appeared low.

Read more about:

AUTHOR

Recommended for you

sub-bgsidebar subscription

Never miss the latest news and developments in wealth management industry

MARKET INSIGHTS

GG

So shareholders lose a dividend plus have seen the erosion of value. Qantas decides to clawback remuneration from Alan ...

2 months 2 weeks ago
Denise Baker

This is why I left my last position. There was no interest in giving the client quality time, it was all about bumping ...

2 months 2 weeks ago
gonski

So the Hayne Royal Commission has left us with this. What a sad day for the financial planning industry. Clearly most ...

2 months 2 weeks ago

A Sydney-based financial adviser has been banned from providing financial services in the interest of consumer protection after failing to act on conduct concerns. ...

4 weeks 1 day ago

Insignia Financial has made four appointments, including three who have joined from TAL, to lead strategy and innovation in its retirement solutions for the MLC brand....

3 days 12 hours ago

ASIC has cancelled the AFSL of a $250 million Sydney fund manager, one of two AFSL cancellations announced by the corporate regulator....

3 weeks 6 days ago