Commentary on financial market developments – January 2022
- Tensions between Russia and NATO
- China: problems for property developers
The beginning of this year in the markets was marked by bad geopolitical news, expectations of monetary tightening by central banks and the resulting considerable nervousness. Stocks in most major markets lost significant value, with technology stocks in particular underperforming. Tensions between Russia and NATO over the situation in Ukraine led to a significant rise in the price of oil, which was also driven to higher levels by generally strong demand for commodities.
The biggest problem today is clearly high aggregate demand combined with insufficient aggregate supply, which is reflected in the rapid rise in the prices of goods and services. The high demand is due to the postponement of consumption during the COVID-19 pandemic and at the same time the huge government spending that was meant to prop up the economies during those same times. Supply is adversely affected by disrupted supply-consumption chains that have suffered due to anti-epidemic measures. High inflation is a consequence that is plaguing more and more economies and their central banks will have to start tightening their monetary policies. And that is not a good prospect for equity investors.
The situation in Eastern Europe is still not improving and the threat of conflict between Russia and Ukraine is still very high. The only good news is that Russia and the NATO countries are communicating. NATO’s unity and the declaration of tough economic measures that the Western countries intend to use if Russia attacks Ukraine may also have had a positive effect. Of course, Russian stocks are reacting negatively to this, having lost a tenth of their value in January! This has put Russian President Putin in the uncomfortable position of having the economic interests of the richest Russians who support him threatened, while at the same time having more than 100,000 troops on the border with Ukraine, which he will soon have to use or withdraw back inland. For European countries, the situation is also very unpleasant; dependence on Russian natural gas is a well-known fact.
Chinese development is in big trouble. Yet the Chinese property market accounts for a full quarter of the country’s gross domestic product. It is not only the market leader, Evergrande, that is facing existential problems, but also the number two, Kaisa, which has defaulted on approximately $400 million of senior bondholders and is in debt restructuring talks with them. Large developers Shimao and China Fortune Land Development are also unable to pay their obligations. The Chinese government is trying to respond to the real estate crisis, either by buying assets from state-backed developers or by pressuring banks to lend more to the real estate sector.
At the start of the year, the global economy is facing fundamental problems. The world is awash with credit, but high inflation is pushing up interest rates. Credit will gradually become more expensive and borrowers who have low profit margins and are over-indebted will run into trouble and will be under pressure to sell assets to satisfy their creditors. All this is exacerbated by the tensions in eastern Ukraine. The only good news is perhaps the retreat of the COVID-19 pandemic, with most countries in the developed world gradually relaxing the measures they have taken.