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20 December 2021

Market Round Up

As a consequence of the COVID-19 pandemic, Western markets are more aware than ever of ‘black swan’ events. These events are hard to predict, rare and beyond the realms of normal expectations. In China, they are more concerned with what they call ‘grey rhinos’ which are large and visible problems that are ignored until they move fast. A good example of a grey rhino is China Evergrande Group, which missed making a bond coupon payment earlier this month, when its thirty-day grace period ended. Fitch was one of the first rating agencies to declare that Evergrande’s overseas bonds were in default after the missed payment. Prior to the payment deadline, Evergrande revealed that it would struggle to repay a previously undisclosed guaranteed obligation of US$260m and after the announcement stating their inability to continue to perform its financial obligations, the company declared that it plans to actively engage with offshore creditors to plan a viable restructuring plan. Hours later, Evergrande’s chair was summoned to a meeting with Chinese government officials. As the situation continued to unravel, the company announced that a new risk management committee had been established. Hui ka Yán, the founder and chairperson of Evergrande, is officially the chairperson of this seven-seat committee comprising members from large state-controlled companies.

The Chinese government has taken control of other heavily indebted companies through similar restructuring mechanisms in recent years, the best example being HNA Group, which was effectively taken over by local government officials early this year. HNA’s insolvency is the biggest bankruptcy that China has seen since introducing its first bankruptcy law in 2007. A bankruptcy of a size like Evergrande is, to a certain extent, uncharted territory, as fewer than 100 listed companies have ever gone through bankruptcy proceedings in China. None of the prior examples were as big or as interconnected with the Chinese economy as Evergrande is, so the unwinding process is likely to present significant challenges.

In the UK, fast-fashion retailer Boohoo has warned that its sales growth and profit margins will be lower than expected this year, resulting in a 20% slip in its shares on Thursday. The company pinned the blame on higher rates of items being returned and pandemic supply chain bottlenecks inflating costs. It seemed more like hiding behind circumstances which must have been calculated beforehand and thus raises concerns over the management’s ability to handle market dynamics. Boohoo now expects net sales growth of 12% to 14% for the 12 months to February 2022, down from previous guidance of 20% to 25%. The company expects a reduction in profit margins at the level of adjusted earnings before interest, tax, amortisation and depreciation to be between 6% to 7%, down from earlier forecasts of 9% to 9.5%. Although Boohoo’s sales in the UK grew, other markets such as the US and elsewhere saw sales fall in recent months.

Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned. The value of investments and any income derived from them may go down as well as up and you could get back less than you invested.

Market Round Up
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