Last week we saw equity markets across the globe falling on account of the news that a Chinese property developer called Evergrande would default on its interest payments. It must be said that equity markets had been looking for a reason to deflate for some time now and that this Evergrande story was as good as any other to trigger a negative response. The question now, is whether this debt default event will set off an international contagion like the 2008 financial crisis, or be contained in China. If it follows the pattern of the Covid-19 virus, we are all in for a bumpy ride – but that does not seem likely.
What it does do, is give the nervous investor a reason to sell some shares and give the positive investor a chance to buy some shares at a reduced price. Unfortunately, we were all wrong in assuming that emerging markets would outperform developed markets at the beginning of the year owing to the lofty valuations of American equities at that stage. South African shares, especially, have been hit hard by the regulatory clampdown in China and we have seen the JSE come tumbling down from very decent returns earlier this year. If you look at the graph below you will see that we are not alone.
Even though the S&P500 index in the USA is trading all the way down at the 50-day moving average, some prominent fund managers in the States are still predicting another 20% fall from these levels. This will be very painful for any investor but we believe that this is very unlikely given the amount of cash in the markets chasing returns and the low inflation expectations over the longer term. Having said that, it remains very important to have sufficient cash in your portfolio to cover your expenses for at least the next three years.
