We left yesterday with the thought that the outlook for the Big Four banks in Australia is mixed, at best.
It was interesting to note that they closed lower yesterday despite the market finishing the day higher.
We can thank the miners for this modest lift. Mostly, they’re chugging along. But, as we know, all roads with them lead to China.
That’s why I couldn’t help but notice the towering level of US dollar debt the big Chinese property developers have.
The Financial Times reports that Chinese issuance of high-yield dollar bonds has doubled this year to an all-time high.
The outstanding value of these bonds is up over 100% since last year.
They’re refinancing a lot of it now. There’s plenty more of this action to come, too.
This is vital to watch over the next two years…
Take a look at the chart below:
Source: Financial Times
You can see that the big Chinese property developers are facing a tidal wave of money they need to refinance over 2020 and 2021.
This is a sector that carries an astonishing half a trillion dollars in debt.
Some of this is in renminbi and a good chunk is in US dollars.
One wonders if a few of the Chinese chiefs of these firms are nervously watching what the Fed will announce on Wednesday in the US.
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The direction of the US dollar and interest rates matter a whole lot for these guys.
And if it matters to them, it matters to us…
Be worried in 2020 over this
Because if a soaring US dollar or rising rates causes them to face a liquidity crunch, then we can kiss the outlook for BHP and Rio Tinto goodbye.
That, combined with an anaemic banking sector, would bring down the ASX like a punch in the solar plexus.
Don’t be alarmed today. I’m tabling a potential scenario for the next year or 2021. It may be that such a turn of events never comes to pass anyway.
But there’s no doubt all that Chinese debt is a vulnerability.
The Chinese authorities can bail out their domestic corporations when it concerns debt priced in Chinese currency.
They have no control over the US dollar, however.
Of course, it may sound strange to even table the notion of higher interest rates.
The world is saturated with the idea that rates are going to stay low for the foreseeable future — maybe even the entire century based off some national bonds. And perhaps that’s the case.
The problem for you and I is that viewpoint is already priced into the markets in such a way that there’s little advantage to be gleaned from it.
The best profit opportunities are via exploiting what is misunderstood or mistaken.
That’s where you get the pricing discrepancies that allows you to buy something crazily cheap relative to the upside.
Conversely, it may allow you to go short when things get priced a little too rosy.
It’s no stretch to imagine that next year the ASX will coast along and the China debt problem I have shown you above festers and then bursts in some way — and blindsides the Australian stock market.
An asymmetric bet in the market today
Perhaps an even better example is WiseTech Global Ltd [ASX:WTC].
In August, WiseTech reached the same valuation as Qantas, at the time ($8.5 billion). That’s despite Qantas banking a billion dollars in profit in 2018 and WiseTech just $40 million.
Credit where credit is due. Fund manager Roger Montgomery pointed out the lunacy of this at the time.
It wasn’t until this month, however, that a short selling attack on WiseTech appeared to prick the momentum behind the stock.
The jury is still out, as far as I know, whether the charges against WiseTech are valid or not.
Regardless, the stock was essentially priced for perfection.
That means the upside was limited but any downside loomed large. And yet someone was buying all the way up.
Everything is easy in hindsight.
Right now I’m hunting for something that could upset the consensus that interest rates are going to stay low.
It may be a false trail…but there’s big profit potential there if I’m on the right track.
PS: To hear all about my favourite asymmetric bet in the market right now, click here.