Global Risks: Energy and China

IN THIS PUBLICATION:

• The current energy crisis has left us dangerously dependent on how low temperatures will get this winter.
• Evergrande is not a systemic risk but will keep driving headlines in the next month.
• Dalio’s all about diversification, Druckenmiller’s all about concentration.

Key Stories

• China Risk: The Evergrande (more on this below) and tech crackdown stories continue to make international market participants nervous as the average exposure to China drops from 5.1% in January to 3.8% in September. Evergrande is down 80% YTD (+90% since peak in 2017), and China Tech is down 55% since February’s peak. Who’s buying?
• Higher Rates: The Norges Bank (Norway’s Central Bank) became the first major western Central Bank to hike rates post-COVID, the BoE argued the case for higher rates “appears to have strengthened”, and half of senior policymakers at the Fed (not all of which are voters in the setting of interest rates) now expect higher rates in 2022. This led to the largest move higher in US yields since March.

• Politics moving left: As our friend and Toscafund Portfolio Manager Bobby Vedral highlights, the political landscape continues to shift further left as the SPD wins the German elections, the UK announces the highest tax increase in 30 years, and all five Nordic countries now have a left-wing prime minister for the first time in more than 60 years.
• Earnings Season: We’ll have 3Q results throughout October and November, and if this season resembles anything like the past year, expect the vast majority of companies to beat expectations, but stock prices to react only mildly positively.

The Energy Crisis

The energy crisis has been caused by the coming together of: