Crisis in China?

A few months ago I wrote an article about the declining standards of debt in issue and how I believe this is going to impact an awful lot of investors that stick with the received wisdom of ‘bonds are safe, equities are risky’.

I was therefore interested to read that 2019 is shaping up to be one of the worst years on record for defaults in China. As the world’s second largest economy it would be foolish to ignore what is happening there – and let me tell you, it’s nothing good.

Despite record levels of stimulus in the economy and forecasts of over 6% growth, data from the country is showing that corporations’ ability to service their debts is rapidly declining. Trillions of yen are owed to banks and lenders in the country and Chinese firms defaulted on over 100 billion of notes in 2018, which was more than triple the value of 2017 defaults. The trend has continued to escalate into 2019 with oil and commodity firms facing liquidity pressures from price drops, an enormous property boom that seems to be bursting, and consumers stretched to the limit with maxed out credit cards and lines of personal credit causing stalling levels of purchases.

It’s not too hard to see similar issues affecting the US at which point both the first and second largest economies in the world will be facing a rapidly declining debt profile that threatens a repeat of the 2007/08 financial crisis. In addition to all this loveliness, we also have the idiotic trade war being ‘fought’ by Presidents Trump and Xi – a tit-for-tat escalation that’s seen hundreds of millions of pounds of tariffs piled onto everything from cars to steel and pork.

Global market have begun to sag in the face of these pressures as they neared a full recovery from the slump at the end of 2018 – we never quite returned to where we were and markets just can’t quite seem to believe that the global economy is going to get better rather than worse.

Not everything is doom and gloom however, as this is a great time to be dusting off the watch list for your portfolio. The very best time to buy is when markets are in free-fall panic mode and if the current trend continues we’re going to see more and more fantastic companies go ‘on sale’ as stock speculators and momentum traders panic sell out of their holdings and prices crash. I’ve been spending the last few weeks researching opportunities and setting up alerts for when stocks become a bargain.

When panic sets in and markets really enter free-fall, you’ll find amazing opportunities to make money over the long-term. The key thing is to research your opportunities and to be patient – if a company looks like a good buy at £5 a share, it would be an amazing buy at £2.50, and I regularly buy companies that are at 20, 30 and even 50% undervalued from my estimates of fair value.

As a wise investor once said, “if you could buy £10 notes for £5, you’d buy as many as you could get your hands on. So why not the same with £10 shares that have slumped to £5?”.

Sign up to receive the latest content, fresh from the press.

I don’t spam! Read our disclaimer for more info.