What does the Evergrande debt crisis mean for China’s economy?

As the COVID-19 virus spread across China in the early months of 2020, some expert commentators dubbed it as China’s “Chernobyl moment” – an event that would undermine the legitimacy and rule of the Communist Party. A much more likely candidate for that title has emerged, though, in the form of the debt crisis enveloping Evergrande Real Estate Group.

China’s second largest property developer and the most indebted developer in the world with over $300bn of liabilities is out of money, and unable to meet interest payments due to both banks and foreign bondholders — though it was reported on Wednesday 22 September that some agreement has been reached to meet an interest payment to domestic bond holders. Evergrande Real Estate Group is also a kind of metaphor for the wider debt crisis in the Chinese economy. Material consequences for both China and the global system are sure to follow in the coming months.

The immediate problem is the unravelling of Evergrande Real Estate Group, which owns more than 1300 properties in more than 280 cities across China. Until now, the Chinese government has refrained from stepping in, choosing instead to make an example of Evergrande’s “capitalist excesses” to banks and others as a way to encourage more conservative methods.

Yet some sort of state bailout or restructuring is inevitable for the developer, at least to buy time. Otherwise, the financial contagion, and economic and social instability consequences of a messy default, would be catastrophic for Xi Jinping, especially ahead of the important 20th party Congress in November 2022. Consider that much of Evergrande Real Estate Group’s liabilities comprise pre-sale deposits by almost 1.5 million households, all of which would see their savings lost. Evergrande’s employees and others bought financial products that it issued to help fund itself, and they too would risk losing money in a worst case scenario. The Chinese government will not want unhappy citizens to be on the hook. We expect that rather than a spectacular “Lehman-type” crisis, China will go through a period of financial distress, which will postpone growth.

Deloitte chief economist comments on inflation figures from the ONS

Commenting on the latest inflation figures, published by the ONS today, Ian Stewart, chief economist at Deloitte, said:

“Inflation hit a low last year and, while still less than half its target rate, is likely to rise gradually over the next year as activity snaps back. Rising unemployment and slack in the economy will limit inflationary pressures and keep the Bank of England’s focus on activity.”

Ian Stewart is a Partner and Chief Economist at Deloitte where he advises Boards and companies on macroeconomics. Ian devised the Deloitte Survey of Chief Financial Officers and writes a popular weekly economics blog, the Monday Briefing. His previous roles include Chief Economist for Europe at Merrill Lynch, Head of Economics in the Conservative Research Department and Special Adviser to the Secretary of State for Work and Pensions. Ian was educated at the London School of Economics.

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Private markets forecast to grow to $4.9tn globally by 2025

The report, Prime time for private markets: The new value creation playbook, examines prospects for four primarily illiquid asset classes of private equity (including venture capital), infrastructure, real estate and private credit across a range of scenarios for 2019-2025.

The report projects significant growth for the value of private markets of $5.5tn (best case), $4.9tn (base case) and $4.2tn (worst case) depending on how global economic conditions respond to the disruption caused by COVID-19.

Will Jackson-Moore, global leader for private equity, real assets and sovereign funds at PwC says: “The report highlights the continued emergence of private markets as a fast growing and highly impactful portion of global capital markets. Investors continue to look to the sector to deliver the yields that lower risk and more liquid asset classes struggle to match.

Yet this is also an opportunity for private markets to take a lead on ESG and net zero commitments and demonstrate the impact they can make in public perception beyond public markets.”

Opportunities across asset classes

Even in the worst case scenario of a prolonged recession, the projections look ahead to growth of almost 50% up to 2025.

While private equity is very much “the asset class of the moment” there is evidence that there are significant opportunities for growth and returns in areas such as real estate, infrastructure and private credit.

Will Jackson-Moore says: “While opportunities for growth are out there, it is important to emphasise that returns will be harder to find and be more aggressively fought for. Managers will need to be innovative in their approach to value creation and respond swiftly to changing investors and governmental expectations as economies recover from the effects of the crisis.”

ESG and going beyond financial return

Will Jackson-Moore says: “Our research highlights the extent to which financial return is no longer the sole driver of private markets growth. ESG and Net Zero commitments now represent a significant source of value preservation and creation.

Private market managers need to respond by looking at how to apply an ESG lens to investment strategy and product development. Whether it is in impact turnaround initiatives in which ‘dirty’ production facilities are turned green, or building strong commitment to diversity and inclusion at your organisation, these matters are no longer an overlay.”

Global Top 100 companies bounce back from March 2020 lows

Global equity markets have seen a strong bounce back from the low points seen in March 2020, but volatility remains elevated, according to a new quarterly update to the Global Top 100 companies by market capitalisation rankings, released today by PwC.

The report notes that, most immediately, a disappointing reporting season for H1 2020 earnings could cause a re-evaluation of recession risks and associated stock valuations.

Having decreased by 15% ($3,905bn) from December 2019 to March 2020, the market capitalisation of the Global Top 100 as at June 2020 was only 1% ($335bn) behind December 2019.

By comparison as at 30 June 2020 the MSCI World Index (representing large and mid-cap equity performance across 23 developed markets) was 7% behind December 2019, having recovered most of the ground lost in the first quarter of 2020.

Ross Hunter, IPO Centre Leader at PwC says ‘With the significant volatility in financial markets, the world’s largest companies provide relative security for investors. The concentration of Technology and Consumer Services companies is a key driver of the Global Top 100 outperforming the wider market index.

‘This is a challenging environment for all companies, but there are clear distinctions in the relative performance of different regions and sectors. I hope this quarterly review will provide interesting insights into how the markets are viewing the world’s largest businesses as they adapt to this uncertain landscape.’

Regional analysis:

  • Global Top 100 companies from the US and China and its regions recovered first quarter losses in March to June 2020 – Europe and the rest of the world did not recover the lost ground.
  • Technology companies contributed to a 21% market capitalisation increase for US companies from March to June 2020.
  • The performance in China and its regions since December 2019 benefitted from a combination of being further advanced in recovering from the effects of COVID-19 and a strong Technology and eCommerce (Consumer Services) component.

Companies highlights:

  • Eighty seven of the Global Top 100 companies as at June 2020 saw an increase in market capitalisation from March to June 2020, compared with just ten from January to March 2020
  • 10 companies included in the Global Top 100 as at March 2020 have dropped out and did not qualify for the June 2020 list.

Heat decarbonisation would spur UK’s green economic recovery

A new report published by the Net Zero Infrastructure Industry Coalition explores the scale of infrastructure change needed to achieve net zero heat. The challenge is such that urgent action is required, but the transition to net zero heat offers tremendous opportunities and could lead to the development of completely new industries offering large scale employment and economic growth across the UK.

Written by a group of forward-thinking UK businesses and public sector organisations, The Path To Zero Carbon Heat report provides pathways for decarbonising the heating of Britain’s homes and workplaces by 2050 – responsible for 20% of the UK’s greenhouse gas footprint. It presents three possible scenarios and highlights the need for government to make early decisions about the paths to take and set supporting regulation:

  1. The electrification of heat, replacing natural gas, together with electric vehicles replacing petrol and diesel, will lead to an almost quadrupling of total electricity capacity to 400GW in 2050, up from 110GW today, including a more than five-fold increase in wind and solar generated electricity from 37GW today to 170GW in 2050.
  2. A hydrogen led scenario for heating is reliant on the rapid development and demonstration of new hydrogen technology across all aspects of the energy system within the next five years. This will then require creating and scaling of hydrogen production and transmission to produce 100GW to supply over 15 million homes plus non-domestic users. Electricity capacity will still more than double, owing to the electrification of personal transport, to 250GW.
  3. A hybrid approach will potentially reduce the scale of new infrastructure needed but has much greater system complexity and optimisation challenges. It will still mean an almost three-fold increase in electricity capacity to 280GW by 2050, in addition to between 20GW and 30GW of hydrogen production. The hybrid approach offers the potential to reduce electricity capacity by 25% in comparison to the electrification scenario, and hydrogen capacity by at least 70% in comparison to the hydrogen scenario.

Anne-Marie Friel, infrastructure partner at Pinsent Masons said, “Decarbonising Britain’s infrastructure will unleash a wave of new investment, growth and employment. Government needs to seize this opportunity and accelerate policy and regulation as key enablers.”

The report does not prescribe a specific route to net zero heat, but all scenarios considered present challenges. All require taking technologies such as CCS and auto-thermal reforming from pilot stage or infancy, through to readiness in the late 2020s, through to mass deployment starting in 2030 and continuing to 2050. This represents an enormous challenge in infrastructure deployment previously unseen in the UK.

The development of infrastructure will need to be accelerated quickly and maintained. For example, the massive scale of electrical generation capacity as part of the electrification scenario represents deployment of renewable technology at close to 10GW/year – scales of deployment with few historic precedents. Deployment for end user heating systems themselves will also happen at a tremendous rate with conversions of over one million sites in each year in some scenarios.

The changeover to Net-Zero heat requires a complex mixture of national, regional and city involvement, systems thinking and extensive digitalisation. Getting this mixture right could radically reduce cost and delivery times, and requires all stakeholder to take action in the near term.

New skills need be developed, with a refocus of existing expertise. This will require a change in mindset, to think ahead of time and put in place the infrastructure to develop those skills.

Ross Ramsay project manager for the coalition said: “The technology, skills and know-how to decarbonise heat will be in demand globally. This scale of investment in decarbonising the heating of over 25 million UK homes, plus non-domestic buildings, will create new industries, jobs and apprenticeships at scale, and place Britain at the forefront of the race to Net Zero.”

Our report chimes with the findings of the CBI’s (the CBI have been part of the steering group for this project) own forthcoming report on net-zero heat which also highlights the requirement for urgent action and the potential opportunity of green recovery,” Ross continues.

The Path To Zero Carbon Heat has been led by Mott MacDonald with support from a working group comprising Energy Systems Catapult, Engie, Leeds City Council, National Grid, Pinsent Masons, Delta-EE, University of Leeds, the UK Collaboratorium for Research on Infrastructure and Cities (UKCRIC) and the UK Green Building Council.

Deloitte senior economist comments on today’s inflation figures

Commenting on this morning’s inflation figures, Debapratim De, senior economist at Deloitte, said: “The rise in both core and headline measures of inflation vindicates the Bank of England’s decision to keep interest rates on hold in January. Further rises would significantly reduce the chances of a rate cut in the near future.”

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