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stock market update

Over the past several months, the Chinese government has captured market headlines with its litany of legislation aimed at companies in the technology sector.  There are various aspects of the regulations that are contentious, such as the Chinese government’s new rule to limit weekly video game time for children, however the legislation is mostly focused on anti-monopoly and data security regulations.  The regulations have weighed on Chinese technology equities and broadly on emerging markets equities, as one of the most popular benchmarks for the emerging markets equity asset class (the MSCI EM Index) contains nearly 40% exposure to Chinese equities currently.  We believe active emerging market equity investment managers can be favorable to utilize, which can have lower relative weightings to China during this environment.

Earlier this week, global equity markets have traded lower following the increasing concern over the strength of the Chinese real estate market.  The Chinese real estate market has been under pressure for some time; however, the situation has become more acute as the country’s second largest property developer Evergrande is nearing default with over $300B in debt.  The headline was a key catalyst for the global equity market performance on Monday, as the MSCI All Country World Index declined by -2.3% which was one of the most material daily global equity market declines in nearly a year.  One of the primary concerns is the potential for contagion into other property developers and the broad Chinese economy which is the second largest economy globally.  Ultimately, the importance of the property sector within the Chinese economy (direct effects on property contribution to construction and indirect effects on the construction on upstream sectors such as steel and cement, according to Goldman Sachs Global Investment Research) points to a consensus expectation for the Chinese government to intervene with fiscal policy shifts to help ease potential property market declines.

As of the writing of this article, Evergrande is expected to meet its interest payments on its domestic bonds on time which may provide alleviation. We remain watchful of the negative headlines for attractive global equity market opportunities for long-minded investors given the headline volatility.

 

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Chase D. Conti, CFP®, CAIA

Senior Investment Analyst

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