U.S. stock indexes came close to their first real correction in almost a year (however, many individual stocks have been correcting for weeks or months). Of the selection of possible catalysts, the one that seemed to get the most attention is the fear that Chinese real estate developer China Evergrande would precipitate a Lehman moment… or, for the bears, a Minsky moment.
Like many China-related items that rise to prominence in the news, this one did not bear scrutiny. China Evergrande is a large company, but in the context of the Chinese real estate sector, the Chinese economy, and the Chinese corporate bond market, it is not large; it is very small, and the authorities have plenty of firepower to handle it. Since 2016, the People’s Bank of China has kept the financial system flush with liquidity and amply demonstrated that they have no intention of allowing contagion to spread.
Even an Evergrande default would keep overall Chinese defaults well within the 2% annual rate common in developed markets. And Evergrande is small also compared to the failures and cleanups that have been underway in China for the past five years, as it has slowly dealt with the aftermath of the 2009–2016 debt binge that served to insulate it from the global effects of the Great Recession.
As the China Evergrande worries fade from the market’s consciousness, other items will certainly rise to prominence, including ongoing supply chain disruptions, labor market dislocations, the debt ceiling fight in Congress, the fate of the Biden administration’s infrastructure push, and economic growth continuing to fade back from post-pandemic peaks. There is plenty on the table that could cause seasonal volatility into year-end. One such item on the table is the idea of reduced monetary methamphetamine. Yesterday’s Federal Reserve meeting and press conference hinted that the abnormal monetary accommodations — that have helped drive asset prices higher — will be curtailed in the coming months. Growing fears of taxation on wealth and success that sound punitive is another item on the table that can trigger market conniptions. We encourage investors to look for opportunity from the increased seasonal volatility.
When and if that volatility arrives, we believe it would be prudent to use to gain or expand exposure to the themes that we have favored since last year: business digitization, the cloud in all its manifestations, fintech, cybersecurity, advanced business communications and networking, 5G, big data, artificial intelligence, e-commerce, battery technology, green tech and transport, and as noted above, select themes in healthcare, including devices, tools and diagnostics, and disruptive tools for drug discovery and the conduct and management of preclinical and clinical trials.
Thanks for listening; we welcome your calls and questions.
