I have taken several questions from investors regarding the situation unfolding in China as it relates to Evergrande, the Chinese real estate conglomerate. If you have not heard (stop reading here), one of the largest Chinese real estate companies "Evergrande" is on the cusp of a default on credit. You can find the beginning of the story, by clicking here.
1. Will Evergrande have an impact on my portfolio?
A: Chances are, you do not have any direct exposure. Most of the exposure is not in the form of debt, and of that debt, 80% is in the form of on-shore Yuan denominated exposure. If you are holding Emerging Market specific high yield funds, you may want to inquire with your manager. Even then, on a relative basis, your exposure should be minimal.
2. Is this Lehman Bros 2.0?
A: It is going to be bumpy in the short term, and inevitably, there will be fallout. With that said, Chinese leadership has a great deal of direct influence in their business community, and a disorderly liquidation is not in their best interest. There may be no specific "bail out", but there are examples in the past where the government has intervened directly (click here), so this is nothing new.
3: Yes, but 300 Billion??!
A: Big numbers to be sure, but the landscape is significantly different today. The level of debt relative to the overall Chinese real estate market is small. Secondly, the level of liquidity in global markets right, is much higher than it was at the beginning of the Global Financial Crisis.
Summary: Given the state of interest rates, and the projected direction of same, your fixed income portfolio should be focused on quality improvement, as opposed to moving out on the risk spectrum. The overall environment in fixed income makes it very challenging to make money. A focus on capital preservation should remain the first pillar of that portfolio.