Why FTSE 100 investors worrying about Evergrande’s trouble

Highlights

  • London equities slipped into negative zone after three-day rally
  • Investors’ sentiment have been severely battered by the Evergrade’s situation
  • Persisting staff crisis have worsened the dynamics for businesses and investors.

UK shares have oscillated in red after starting on negative footing on Friday, 24 September with the benchmark FTSE 100 witnessing a marginal correction after investors’ fears renewed over Evergrande Group’s apparent collapse as it missed an interest payment deadline due on Thursday, 23 September.

How big is Evergrande’s problem?

Companies, as big as Evergrande Group, defaulting on interest payment have spooked financial markets in the past as well.

During the middle of the global financial crisis of 2008, the entire equity ecosystem remained on a brink of collapse, as and when a sizable corporation reported a default, prospective loss, and anticipated slippage.

Lehman Brothers, the then fourth-largest investment bank in the United States, was one the biggest corporations to file for bankruptcy protection which immediately unnerved the global equity sentiments with the leading stock indices registering massive losses on 15 September 2008. Back then, there was a widespread contagion effect following the collapse of Lehman.

Now, Evergrande’s no show to the bondholders have apparently created a room for a largely similar situation as multiple institutional investors have subscribed to the bonds, and are terrified to see the corporation crumbling down.

Subsequent to the missed deadline, the debt-ridden company has not made any announcement so far with regard to the interest payment or a prospective plan for restructuring the debt. This has considerably aggravated the uncertainty as the group stands with a cumulative debt of nearly $305 billion. With a mammoth-sized debt, the company can severely impair China’s financial system, as well as the confidence of global investors.

In the present week itself, the who’s who of the capital markets have encountered alarming corrections on Monday with the leading stock indices tumbling to multi-month lows.

FTSE 100 (5-day performance)

FTSE 100’s performance in the week after EverGrande’s crisis unnerved global investors.

Source: REFINITIV

Partially alleviating the investors’ concern, Evergrande Group serviced a coupon payment due on a domestic bond in the current week. It has further stated to prioritise investors’ interest but it has seemingly failed in keeping up the promise after the deadline of $83.5 million interest payment on a bond elapsed without any formal communication from the group.

With back-to-back deadlines for the interest payments, the second-largest real estate developer in China is apparently approaching a potential default, unless the corporation comes up with a rescue plan that can manage the upcoming debt obligations. Following a no show on the recent interest payment, a 30-day grace period has started for the company to service the debt.

Persisting pain

The domestic markets are already reeling under the pressure of ongoing pandemic challenges with the petrol stations operating with reduced capacity due to the shortage of HGV drivers, while a considerable number of retailers are functioning with partly-filled shelves due to the similar problem. 

The Bank of England signalling towards an interest rate hike in the near term, possibly anytime before March 2022 has somewhat battered the investors’ optimism. The worries of the central bank have escalated with the inflation persisting at 4%. Also, some participants of the nine-member MPC have shifted their tone on the outlook, pressing to moderate the bond purchases soon.

Meanwhile, the GfK consumer confidence decreasing by 5 points in September 2021 has furthered the jittery as consumers try to combat with the rising headline inflation, higher utility bills and tax hikes. A sizable increase in the monthly payments, at a time when the furlough scheme is set to end in a week’s time can be detrimental for equities as it renews the challenges for domestic market participants.

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