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SEP. 24, 2021

The Busiest September in more than a Decade

A lot has been going on since the beginning of the month, and China has been at the forefront of the macro picture. Since the beginning of the week only, Evergrande has been the subject of four out of five emails we have received and five out of five calls we have held.

Evergrande is a Chinese property developer. After some noise earlier in the summer, the news came out at the beginning of September that the company was planning to suspend the interest payments on two loans due on September 21st and the following days.

There has been a lot of discussion on whether this can be considered the “Lehman moment” of China. We believe Evergrande’s issues are highly unlikely to create a systemic risk. Whilst the company does have a large debt burden, it is insignificant given the scale of China’s financial system. We expect the government to get involved with the debt restructuring and the most likely outcome to be for lenders to get a haircut, a restructuring of the debt and the sale of company assets.

Nonetheless, the uncertainty arising from China translated into volatile equity markets worldwide. The biggest sell-off happened on September 20th, when the market was down approximately 2% intraday, before closing the day at -1.63%. We believe this sell-off is primarily driven by technical selling flows (CTAs and option hedgers) in an environment of poor liquidity, and overreaction of discretionary traders to perceived risks.

Whilst we think that the situation may take a while to resolve, we will use these volatile times to rebalance the portfolio at more favorable prices. After all, during panicky times, volatility may, in fact, create interesting entry points.

With further recovery still ahead for lagging pockets of the global economy and policy makers fully aware of the perils of premature tightening, the next 12–18 months should be a period of good returns in equities, private assets, and Emerging Markets. U.S. rates should drift higher towards 2%, a move likely to be repeated by other liquid sovereigns, as central banks exit emergency measures in well-advertised baby steps, and the dollar should glide lower as the global recovery takes root.

We thank you for the continued support.

The FAM team