TL;DR
- Chinese property giant Evergrand has filed for bankruptcy after notching losses of $81 billion (yes, with a B) over the past two years
- The Fed’s meeting minutes have been released, and it suggests that more hikes aren’t off the table if inflation begins to creep back up
- Even if things are looking super peachy, at Q.ai we’ve got Kits for every eventuality. The Recession Resistance Kit is your go-to should markets turn sour
- Top weekly and monthly trades
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Major events that could affect your portfolio
The U.S. market has had its worst week in quite some time, and there are a number of different factors at play. One of the major issues which has reared its head again is the challenges facing the Chinese property market.
This isn’t the first time we’ve heard of this, and in fact the situation has been bubbling along for a number of years now. Chinese property behemoth Evergrande first defaulted on a debt repayment back in 2021, and this week they have finally filed for Chapter 15 Bankruptcy in the U.S.
It comes just a matter of weeks after they announced losses of $81 billion over the past two years. That’s…a lot.
The collapse of Evergrande has been touted as China’s ‘Lehman Brothers moment,’ foreshadowing a potential collapse in the Chinese real estate sector, which has undergone a multi-decade boom fueled by borrowing and speculation.
As with the United States own property collapse (which recently saw the final fraud case of that era settled by UBS), there have been concerns that a real estate crash in China could spread to the rest of the world, given the interconnectedness of the global economy and the fact that the real estate sector makes up around 30% of China’s GDP.
The main conduit for potential ‘contagion’ would be the bond markets, with large scale defaults on debt having the potential to impact asset managers and their clients (investors) all over the world. As of right now that doesn’t seem to be an immediate concern, but it’s definitely a story for investors to keep an eye on.
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So there’s a bit of general nervousness about the situation in China nagging at markets, but there are issues at home adding to that feeling.
We’ve been talking about inflation and interest rates a lot over the past year, and unfortunately, it doesn’t look like we’re going to be able to stop anytime soon. Because while inflation has come down substantially and is now hovering around the Fed’s target range, the release of the FOMC’s latest meeting minutes show that they’re not confident they’ve given it the boot for good.
“Significant upside risks to inflation could require further tightening of monetary policy” was the key excerpt that got markets worried. While it might seem like a fairly benign statement, it showed that the Fed sees the possibility for inflation to spike again, and that they wouldn’t hesitate to hike rates further.
This comes after headline annualized inflation rose from 3% in June to 3.2% in July.
Why is this a potential problem for investors? Well it’s no secret that the cycle of rate hikes has been tough for business and consumers alike. We’ve seen the cost of debt go through the roof while prices for almost everything have been pushed higher.
So far the economy has remained pretty resilient in the face of these increases, but many of the positives from company earnings have been as a result of layoffs and efficiency improvements. There’s only so far that can go before falling revenue means falling profit, and many companies slashing their forecast numbers.
This week’s top theme from Q.ai
All of this is to say that there are some dark clouds on the horizon, but right now it’s not clear if the storm is going to sail past while we watch in the distance, or if we’re going to be hit with a downpour and gale force winds.
For investors that’s important, because the assets that perform the best during boom times are often not the ones which perform the best during a recession. When markets are good, it’s growth assets which are positioned to provide the biggest returns.
They tend to be higher risk, but with a strong economy there is plenty of money flowing around to keep them going. We only need to look at the low interest rate environment over the last ten years to see how access to cheap cash can lead to serious gains for investments. Particularly in the tech sector, we’ve seen the VC playbook create multi-billion dollar companies without ever turning a profit.
This changes during times of high interest rates and recessions, as funding dries up and demand slows. When that happens, growth slows and valuations follow. At the same time, slow and steady assets such as value stocks and bonds become the go to investments, providing a more stable base for investors to minimize losses, and maybe even make gains.
This prospect of a changing economy is why we recently launched the Recession Resistance Kit. It won’t give you rockets to the moon during boom times, but chances are it will hold up well if things get shaky.
Top trade ideas
Here are some of the best ideas our AI systems are recommending for the next week and month.
Brookdale Senior Living (BKD) – The retirement living company is our Top Buy for next week with our AI giving them an A rating in our Growth and Technicals factors. Revenue is up 7.9% over the last 12 months.
Freshpet (FRPT) – The pet food company is our Top Short for next week with our AI giving it an F rating in Quality Value and Technicals. Earnings per share was -$1.32 over the last 12 months.
Euronet Worldwide (EEFT) – The payment services company is a Top Buy for next month with our AI rating them an A in Growth and Quality Value. Earnings per share is up 104.9% over the last 12 months.
Stanley Black & Decker (SWK) – The tool company is a Top Short for next month with our AI giving them an F rating in Growth. Earnings per share was -$0.54 over the last 12 months.
Our AI’s Top ETF trades for the next month are to invest in fintech, industrials and healthcare and to short senior debt and U.S. value stocks. Top Buys are the ARK Fintech Innovation ETF, the Vanguard Industrials Index Fund ETF and the Invesco DWA Healthcare Momentum ETF. Top Shorts are the Invesco Senior Loan ETF and the Invesco FTSE RAFI US 1000 ETF.
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