Evergrande contagion fears are over exaggerated – Steven Nathan

10X founder Steven Nathan joins the BizNews Power Hour to share his insights on the latest developments happening in global markets. China’s second largest property developer, Evergrande, has been the major talking point in global markets due to potential knock-on effects of financial contagion given the real estate behemoth’s $300bn debt pile. The commodity sell-off is talked about at length, with Nathan outlining the difficulties in ‘calling a bottom’ when it comes to the resource counters given the inherent volatility in commodity prices. Gold as a safe-haven asset in times of turbulence, local banks and Telkom spinning-off its Swiftnet unit are all touched upon. – Justin Rowe-Roberts

Steven Nathan on the Evergrande contagion fears:

It hasn’t run its course. There’ve been some people saying – well, is this China’s Lehman Brothers moment? It doesn’t seem to be as bad as that but it is a very sizeable property company. I think it’s got something like $300bn of credit exposure. One of the concerns is the knock on impact. So if there’s a problem there, who else does it impact? It can almost have a domino effect but it doesn’t seem to be anywhere near that. But it is a concern. And also the markets in general are quite skittish given how strong markets have been and a lot of the risks in the markets. So the markets have been really strong since the pandemic. I think if we all had to guess when this pandemic started if markets would be higher or lower – I don’t think many of us would have expected markets to have done as well. Obviously, interest rates are much lower, which is good because it does facilitate – does make markets stronger – it does make investments more valuable because you are discounting the future profits at a much lower rate. But there’s consequences to that because it means that rates are more likely to go up than down as well as inflationary pressures.

On the weakness in the commodity prices:

Well, China is the biggest consumer of commodities. China tends to determine where commodity prices are going and their very strong economic recovery – probably the strongest of the big economies that has fuelled the demand for commodities. We saw a very strong rise in commodity prices. Commodity companies are very highly geared. So they are very sensitive to small sorts of changes. So a relatively small increase in commodity prices is very good. But once again, on the downside, a relatively small reduction in commodity prices is very bad for their profitability. A lot of the problems we’re talking about globally are around China. It’s around what we know through Naspers and Tencent. You mentioned Evergrande on the property side. There’s a lot of concerns in China. Those concerns are inferring that we are going to have lower economic growth and as a consequence, lower demand for commodities. Once again, I think it’s quite surprising how quickly it’s happened because it wasn’t that long ago where everyone was talking about the commodity super cycle.

On gold as a safe haven asset: 

Generally speaking, you do better buying the metal than you do buying the companies. So that’s been the better bet and it’s been the better long term bet. Gold over the long run is not the best asset class as a long term investor. So this is much more sort of a trading opportunity. Gold is always seen as a safe haven. So when there’s more uncertainty and more sort of chaos and people are concerned about equity markets and the financial risks therein and geopolitical issues with China as well would come into that. Then gold becomes interesting to look at. But personally, I’m not someone who holds gold in high esteem as a long term asset.

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