1. Stock market crash: the ‘October curse’

It’s been said that history doesn’t repeat itself, but often rhymes. Historically, October has been perhaps the worst month for market meltdowns. For example, the Wall Street Crash of 1929 happened in October, triggering the Great Depression of the 1930s. The 1987 stock market crash happened in October and October 2008 was one of the worst months for stocks during the GFC. October has acquired a fearsome reputation as one of Mr Market’s worst months. Indeed, in Pudd’nhead Wilson, American author Mark Twain wrote: “October. This is one of the peculiarly dangerous months to speculate in stocks.” But to be fair, he added: “The others are July, January, September, April, November, May, March, June, December, August, and February.” 

2. China Evergrande

Evergrande Real Estate Group (SEHK: 3333) is China’s second-largest property developer (and a global giant). But its bonds and shares have plunged this year, on fears the massively indebted real-estate group might default on its debts. The over-stretched company has over $305bn of outstanding debt and other liabilities. Last month, Evergrande missed a scheduled interest payment to overseas bondholders. Thus, credit-rating agencies may place Evergrande in default this month. Global investors are genuinely worried this might trigger a ‘Lehman moment’. That’s so-called because the US stock market crashed after US investment bank Lehman Brothers declared bankruptcy in mid-September 2018.

Evergrande needs to rapidly sell enough assets to raise cash and avoid debt default. If not, its woes might spread to the wider Chinese property market. But selling assets in a fire sale might not raise enough cash to keep the group alive. And if the Chinese Communist Party decides to let this property behemoth sink, it could set off stock market crashes in China and Hong Kong. If this contagion were to spread to US and UK stocks, we might all be in for a rough ride.

3. Monetary policy, inflation and interest rates

My third possible spark for an October stock market crash combines three things. They include monetary policy, consumer price inflation and interest rates. In our highly indebted world, higher interest rates might be the pin that bursts our bubbles. Recently, a few central banks have lifted interest rates in order to curb rapidly rising inflation. My big worry is if/when the Federal Reserve decides the US economy is overheating. If inflation stays high and the US labour market keeps strengthening, Fed chair Jerome Powell may start tightening US monetary policy. This could start with lower asset purchases, then move to higher interest rates. In this scenario, I would really worry about the fate of America’s most highly indebted businesses in any stock market crash.

Finally, I’ve learnt not to fear stock market crashes. I simply buy quality shares at bargain prices and then await the next bull (rising) market!

1. Evergrande’s debt is a crushing burden

Evergrande is one of the world’s most heavily indebted companies. It had total liabilities (debts and other obligations) of $305bn at mid-2021. As a leading property developer, it also has massive assets (totalling almost $357bn at the end of June). Nevertheless, the developer is close to default and last month missed a scheduled interest payment to overseas bondholders. Worryingly, October could bring one of the largest debt defaults since the collapse of Lehman Brothers in mid-September 2008. Unfortunately, even cheap debt can become hard, unforgiving, and a double-edged sword.

2. Liquidity is king

In many corporate crunches, problems caused by excessive debt can be solved by cold, hard cash. When times get tough, liquidity — the availability of cash and highly liquid assets — is crucial. Without cash at hand, a cash crunch can quickly spiral into a liquidity crisis where liabilities go unmet. When this happens, shares and bonds of cash-crunched companies can crash spectacularly. For example, Evergrande’s Hong Kong-listed shares are down more than five-sixths (-85.1%) over the past year and are currently suspended. So look out for liquidity problems within your portfolio’s businesses.

3. Diversification can be ‘diworseification’

In its efforts to become a global giant, Evergrande undertook an immense spending spree. The real-estate developer became a conglomerate, acquiring dozens of unrelated businesses. The group has invested in electric vehicles, theme parks, food and beverage businesses — and even a football team. In 2010, it bought the club now known as Guangzhou Evergrande FC and then spent $185m building a vast soccer school. It’s also building the world’s biggest soccer stadium for $1.7bn. For me as an investor, lavish spending on non-core businesses has always been a red flag.

4. Evergrande’s asset sales become fire sales

With huge debts to service, Evergrande is raising cash by selling whatever assets it can. Right now, the company is in discussions “about a major transaction”. But when desperate, ailing companies rush to sell assets in a hurry, they have little room to negotiate. As a result, sale proceeds can be considerably lower than anticipated. Hence, in times of company or market crisis, it’s important to realise that panicked or sustained selling can trigger significant falls in asset prices.

5. All booms end in busts

Over the past 30 years, China enjoyed a massive construction and housing boom. Today, real estate contributes almost three-tenths (29%) of Chinese economic output. And house prices in China — as in many other leading nations — have soared this century. In the five years to 2020, house prices soared by roughly half (50%) across China. But with Evergrande now on the brink, worries about contagion are hammering China’s property market. What’s more, with empty properties with room to house 90m people, China’s housing market could be heading for a crash in 2021/22.

Evergrande is the Chinese real estate firm at the centre of worries that have spread across the world’s stock markets in recent weeks.

The company is suffering under huge debt problems, and fears have been aired that it could even go bust. In fact, Evergrande is the world’s most heavily indebted real estate firm, carrying debts of more than $300bn. Evergrande shares have collapsed in 2021.

As well as the impact on stock market confidence, worldwide investors have an additional concern. There are bondholders around the globe. The company has already failed to make an $83.5m interest payment due on 23 September. And some bondholders have said a second payment has also been missed. There has not been a formal default yet, but something surely has to happen quickly.

A buyer for Evergrande?

Some Chinese news outlets suggest the transaction will involve fellow Hong Kong-listed property company Hopson Development. The rumours suggest Hopson is about to buy out 51% of Evergrande for around $5bn.

Hopson, meanwhile, has requested a suspension of trading in its own shares. It says the suspension is “in relation to a major transaction” and that it has “agreed to acquire the shares of a company…“

Following the news, the Hang Seng index in Hong Kong has dropped 2.5%. Will the sale of Evergrande’s property management arm settle the markets, if that is indeed what is happening? We should know soon enough.

Meanwhile, the FTSE 100 index suffered a 1% drop as UK investors worry about the ramifications of Evergrande’s potential collapse. So what’s going on?

Evergrande shares crisis explained