The last time I had written something along these lines was in December 2014 because of China, Commodities, Crude Oil and Credit. And the world markets had crashed within the next 3 weeks. China had dropped 40% or so. Asia Pacific dragged along. Russia panicked. Europe lost ground and it was a contagion, almost. The same reasons multiplied by a few times are looking us into our eyes plus a world wide trade war, including the EU that can absolutely slow down growth in the absence of all the quantitative measures.
The biggest thing that is of the concern is that China’s corporate debt has hit almost an unheard of figure before. Never has the world seen corporate debt of any country touch $20 trillion dollars. Almost 140% if it’s $14 trillion dollar GDP. And it’s total debt has ballooned to $32 trillion. Plus a trade war will slow economic output and the first signs of panic will be in equities markets of Shanghai then in Hong Kong. Equities can be sold off in panic but corporate debt is an absolutely different phenomenon. Usually held by large banks or hedge funds and having the first right on the company’s assets in case of liquidation, institutional investors choke off further credit to the companies, pushing the yield up and prices lower. And no avenues open to finance their ongoing operations.
Europe has seen a 10 year bull run but its trade war with America and multiple tariffs on its exports and retaliatory tariffs on its imports will further dampen the financial enthusiasm. Italy looking for an exit like Brexit is very much a reality now. Shanghai has entered its bear market territory and so has The Hang Seng Index in Hong Kong. Hong Kong being the best IPO market for the Asia Pacific since 4 years will see the death of new listings. That means technology companies will have no financing avenues because Asia is a bigger Tech financier than America as of today.
Oil prices at its highest. With America demanding that the world stop buying Irani oil altogether before October, and this demand of Trump could put oil prices at its highest in 7 to 8 years. It may sound good for the Middle East but it will not be because even the biggest oil producer in the M.E, KSA has its budget deficit growing and will hit the highest since 2015. Its $700 Billion Defence spending will outweigh its gains from a surge in the oil prices by 3 to 5 times. So no gains there.
Dubai financial system in my view is about to collapse. Yes collapse. Because if Lehman brothers can cause the demise of the American financial system, ABRAAJ’s collapse will wipe out confidence in the Dubai financial system as well. Absolutely. Because Dubai’s biggest financial strength was not its stock market but its ability to raise funds in private transactions. No longer will this ability be there after Abraaj, at least in perception. Not because Abraaj was that big, and neither was Lehman Brothers in 2008, but their perception of Goliath like presence was.
Russia is suffering a tremendous set back for 5 years at least with its Rouble in trouble and its stock market in the gutter. On the other hand India with its interconnect trade dependency and procurement weaknesses of raw material is directly in the lime of Chinese fire. China suffers, so does India.
South America’s biggest economy Brazil is seeing upheaval related to its politics spilling over into its economy. Venezuela has come to a point because of the American pressures that its financial system has entirely collapsed. Argentina is in hot waters with uncontrollable inflation and they just borrowed $50 billion from The IMF two weeks ago.
To sum it all up, all these major economies are in trouble and if one or two face a problem, which they will soon in my view, it will be a Contagion Effect. Like jungle fire spreading into the neighbourhoods of California out of the jungles and into the living rooms.
When can this happen ? Nobody can give you an exact date. Maybe next week or maybe in a month or few. Will this happen, I am certain that it will.
Author: Mir Mohammad AliKhan