Fund Update: A property crisis affecting the financial system | FSMOne SG - Research Highlights

Fund Update:

A property crisis affecting the financial system – Evergrande’s impending default has brought about comparisons to the Lehman Crisis of 2008. Is financial contagion inevitable and what should investors do?

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• While an Evergrande default is a near-certainty at this point, we believe that the risks of a Lehman-esque spillover into the financial system are well overblown.

• Preventing full-blown financial contagion will be the priority for the Chinese government, as it would undo much of its work in its push for sustainable growth and common prosperity.

• Instead, we believe that the Chinese authorities are backing themselves to resolve this issue. In the recent past, the Chinese government has dealt with multiple high-profile defaults, and we expect a similar approach here - with a combination of government intervention, debt restructuring, and various entities being requested to step in and conduct “national service” as the likely method of resolution.

• Thus far, the government’s behaviour has backed this up – they have pledged to ensure social stability and have moved accordingly - injecting liquidity into the banking system as well as supporting smaller regional banks that have outsized exposure to Evergrande.

• For the final segment of this update, we provide a quick update on some of our recommended funds that are invested in the Chinese markets: the Eastspring Asian High Yield Fund, the Fidelity China RMB Bond Fund, the Allianz China A-shares Fund, the Manulife APAC REIT Fund, the JPMorgan China Fund, and the UBS Greater China Equity Fund.

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