The world is changing fast and to keep up you need local knowledge with global context.
Ranmore Fund Management’s Sean Peche talks all things topical in the global financial markets as China continues to dominate the headlines. Peche, an ex-South Africa, is a global fund manager that focuses on international equities. He has been ringing the alarm bells on China for months now, given the bearish signals that have been indicated from the Chinese Communist Party since the latter end of 2020. Although Evergrande’s $3oobn debt pile is a major cause for concern, he believes that the potential contagion will be limited to China. Other important global financial markets developments such as the US Federal Reserve’s meeting and implications thereof are discussed at length. – Justin Rowe-Roberts
On the fundamentals behind Evergrande:
The first thing is I actually read the Evergrande annual report in the last couple of days, so we have no exposure here. But a couple of interesting points and maybe that will lead to discussing where the contagion lies – the first is it’s a Cayman Islands company. It’s listed in Hong Kong. But like a lot of these Chinese companies we’ve come to know, it’s a Cayman Islands company. They have 200 million square meters of land reserves. So it’s a massive company, $215bn of inventory. And most of that, interestingly, is funded by deposits. So they have about $150bn of payables. And that’s because people come along, they put down a deposit on some new developments and so those are the guys who are probably going to end up losing here. They also have about $97bn of net debt. So that’s a big number. And what’s interesting is quite a bit of that debt is via the Cayman Islands company. So it’s issued in the Cayman Islands. And so that I think is quite interesting. And we’ll come back to that. Interestingly, in the last few months, they issued a statement when they did a profit warning. I mean, amazingly, they signed their accounts at the end of March that did declare a dividend. Everything was going swimmingly. It’s only in the last few months that apparently things are falling apart and they’ve been selling property to suppliers and contractors – I guess as a way of paying them.
On China’s ‘common prosperity’ drive:
Absolutely, I think I can understand why the Chinese government needs to look after its citizens, they are first and foremost their main concern – foreign shareholders are not their concern. And they’re going to do what is in the best interests of their citizens. And is it in the best interests of the citizens to be sitting playing computer games all day? I’d argue probably not. But that’s my view. You’ll recall that when this first happened, the regulator sat round and had a discussion and the stocks all rallied. But every week there seems to be a new angle. It’s the casino stocks, it’s the luxury goods stocks, now we’ve got the property companies and so on. The Chinese government’s just looking after its citizens and that’s totally understandable. The problem I think international investors are going to have is that when you look at Russia and Russia just acts in the interests of their governments and their country and their citizens – those companies are in five times earnings.
On the supply chain issues caused as a result of the pandemic:
The monetary inputs that many of the Western governments have done to keep the economies alive, have influenced markets. There’s no doubt about that. They’ve changed markets. One of the biggest issues right now is supply chains. I’m just going to touch on supply chains and just give you an idea. You have the pandemic and so all of a sudden you have ship brokers and suppliers scrapping about 11% of their ships. At the same time, aircrafts weren’t flying and they carried about 50% of cargo. But now you have people sitting at home getting handouts, but they can’t spend those handouts on holidays and they can’t spend the handouts on movie tickets and restaurants. So what do they do? They spend it on stuff and things and that stuff needs to be shipped. But now you’ve got fewer ships. You’ve got Covid interrupting ports. So that’s why you have this massive issue where you have these supply chains backed up.
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