Foreign investors may reconsider Asia allocations in wake of Evergrande debt crisis, says MAPFRE AM

Investors are considering the future for allocations toward Chinese and Asian assets, including bonds and equities, as China’s heavily-indebted Evergrande sparks fears over the health of the world’s second largest economy.


Alberto Matellán, chief economist at MAPFRE Asset Management, says that Evergrande continues to be the “main focus of investors’ attention” after a mounting debt crisis at the company emerged last week.


Evergrande, one of China’s largest property developers, has been struggling to service a USD305 billion debt burden.

The property firm missed a payment deadline on an overseas bond last week, leaving global investors to face the possibility of swallowing large losses if the group defaults.


“At the moment, there is a tense calm because it looks like the company will be able to meet its forthcoming debt payments,” says MAPFRE’s Matellán.


MAPFRE AM is the asset management arm of the Spanish insurance group, and has over EUR40 billion in assets under management.


Evergrande’s main property business in China has privately negotiated a settlement with domestic bondholders, and the firm agreed a separate USD1.5 billion deal to settle its debts with a Chinese bank this week.


Matellán believes that the Evergrande effect could be contained within the Chinese real estate bond market, making its overall impact on markets “more limited” because the “exposure of foreign investors to these assets is not very high”.


Nevertheless, two of the world’s largest asset managers, BlackRock and Vanguard, have already posted large losses on their stakes in Evergrande, whose shares have lost 80 per cent of their value this year.


The developer’s downfall could set off a broader contagion affecting the rest of the Chinese economy, explains Matellán. He notes that the Chinese economy is “already showing signs of moderation”.


August data showed that China’s economic growth is slowing, with consumer spending and industrial production falling behind official forecasts amid renewed outbreaks of Covid-19.


Matellán recalls that the Chinese authorities are aware of the recent growth slowdown and have “already hinted at the possibility of applying stimuli if required”.


This could lead to further policy easing, with People’s Bank of China already boosting liquidity by cutting the reserve requirement ratio for banks in July.


Evergrande’s demise could also have a severe impact on foreign portfolio allocations, with investors perceiving higher risks in China and “strongly readjusting portfolios of all Asian assets, mainly bonds, but also indices”, according to Matellán.

Investor allocations toward China have been on the rise until recently, with an Invesco survey finding that 86 per cent of global asset owners have grown or maintained their China exposure in the past 12 months.


"This is the most dangerous option but it’s not the central scenario because although mistakes may be made, the Chinese government has no interest in allowing this to unfold,” says Matellán.


Meanwhile, Rob Brewis, fund manager at Aubrey Capital Management, says that Evergrande’s downfall will echo throughout China’s property and financial sectors.


The USD1.6 billion Edinburgh-based asset manager noted in September that it had slashed its positioning in China to just over 30 per cent, from 55 per cent at the start of 2021.


“It certainly won’t be the only Chinese developer to fail. No doubt there will be plenty of pain across the financial sector, especially in smaller banks and the murky world of “shadow banking,” says Brewis.


The decreasing status of the property sector means China’s GDP growth is losing “one of its biggest props”, says Brewis.


“Potentially, Evergrande is a symptom of the last gasp of one of the greatest property booms known to mankind,” says Brewis, noting that this was driven by the urbanisation of China’s vast population, which is rapidly ageing.

This is not necessarily a “systemic risk” to China’s economy, which has been moving away from its reliance on property sector for some time, according to Brewis.


“Who knows where Chinese property prices are going, but one would suspect this is not an overly positive development,” says Brewis.


“But the broadening of the Chinese household balance sheet, (which, on aggregate, is under-leveraged) away from its heavy reliance on property and cash, into other wealth management areas (equities, mutual funds perhaps) is an area of huge potential growth. This can only accelerate this trend.”


Brewis believes that many sectors including electric vehicles, dairy consumption, athletic wear, mass market cosmetic brands, convenience shopping and food delivery, will continue to see growth.


“And the best companies in these sectors, which are ungeared and cash generative, will continue to thrive. As it happens, valuations of these have just got a lot more attractive,” says Brewis.


INSTITUTIONAL ASSET MANAGERS