Why Evergrande is Not Lehman and Why That is Good News for Traders

Justin Freeman

Evergrande Logo Through Magnifying Glass

Casimiro PT / Shutterstock.com

Trouble in China’s property market has caused reverberations across the global financial system. However, there are reasons to consider this a chance to buy the dips rather than sell up. The US Federal Reserve’s interest rate decision is indeed looming over the markets as much as the perilous state of Evergrande. However, this could well be a moment for the famous ‘Diamond Hands’ traders to step up, not least because brokers appear to be holding up well in the face of considerable economic turmoil.

Market analysts like to attribute price moves to events. Matching a market move with a real-world story brings comfort and a perceived greater understanding. The reality is that sometimes the price itself is the leading indicator, which could have been the case over the last two weeks. The slump in global equities and other risk-on assets over the last fortnight has seen more than five per cent shaved off the S&P 500 equity index. Not only that, but volatility is building. The trendlines on the downward channel are diverging rather than converging, which gives the price a lot of room to oscillate.

SP500 Chart for week of 23rd September

Source: IG

This Time it is Different

This time, the argument that things are different – that Evergrande is not the next Lehman – is based mainly on the types of assets each holds. The collapse of investment bank Lehman Brothers in 2008 caused a financial market meltdown, mainly due to the negative cycle of its assets being continuously devalued. As the relatively liquid financial instruments it held fell in value, investors sold and exacerbated the situation. Evergrande, on the other hand, has a portfolio based on real estate. That market is not immune to price crashes but illiquid assets being marked down in value are very different from being offloaded in actual transactions. To give Evergrande the same importance as Lehman’s, you’d have to bet against the long-term prospects of China’s economy and the likelihood of the Beijing government being willing to step in to avoid a crisis.

Pullback or Correction?

Compared to the events of 2008, this looks more like a pullback rather than a correction, and on Wednesday morning, investors were stepping back into long positions in stocks. The traditional lull before the US Federal Reserve interest rate announcement will allow time for price to consolidate. If the Fed doesn’t surprise the market, there is potential for an uptick in equity prices.

The differences between Evergrande and Lehman is good news for those looking to go long. Pullbacks represent buying opportunities, whereas corrections threaten the financial system. Forex Fraud has previously identified even big-name brokers such as IG leaving retail investors high and dry.

Those who think the Evergrande situation is more concerning might want to consider checking the reliability of their broker and keep their fingers crossed the IG debacle doesn’t occur again.

 

 

Crowdsourcing information about scam brokers can help others avoid falling into the traps set by disreputable brokers, and you can share your experiences here. If you want to know more about this particular topic, or have been scammed by a fraudulent broker, you can also contact us at [email protected]


Justin Freeman

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