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Evergrande: A timely reminder about risk

Just a fortnight ago, most of us hadn’t even heard of the Evergrande Group.  But recent developments have changed that.

Just in case you missed it, Evergrande is a Chinese property developer that has run out of cash.  It is probably going to default on its debt obligations. The big problem is, Evergrande is massive and its finances are entwined with financial institutions right across the world.

The most indebted company in the world

Evergrande is one of the three biggest property developers in China with more than 1,300 projects across 280 cities.  Much of its growth has been financed by debt.  In fact, according to research house Morningstar, Evergrande owes more than US$300 billion, making it the most indebted company in the world. 

Now it’s having trouble meeting its commitments and its share price has crashed more than 86 per cent just in the last year. 

But it’s not only the Evergrande shareholders and Chinese banks that should worry.  Global investment managers like UBS, BlackRock and HSBC have all been buying Evergrande bonds in the past year.

Too big to fail

In echoes of the Lehman Brothers failure at the start of the Global Financial Crisis, much hinges on the response of the Chinese government.  The collapse of Evergrande would have serious implications for the Chinese economy, and there would be repercussions across the world.

The good news is that China is unlikely to allow this to happen.  And because the Chinese State owns most of the banks, they have control.

But the bad news is that even in a best-case scenario, there will be a slowdown in the Chinese residential property sector.  China is Australia’s biggest trading partner, and this is already having implications on the iron ore price and the share prices of Australian mining companies.

Impact on pre-retirees and retirees

Markets go up and markets go down, and that should be of little concern to younger investors.  But for investors in the Retirement Risk Zone, the years either side of retirement, returns really do matter.  Investment losses during this period can have an outsized impact on the success of your retirement.

Sooner you start planning, the better

It’s why there is no place for complacency in a retirement plan. If you are within five years of your planned retirement date, you should engage with your super. 

Keep in mind, there are ways investors can manage risk and build certainty for the future.

At Daniel Crump Financial Planning we employ a framework that is designed to balance your short-term and long-term risks, so you can confidently spend today.  If you’d like to learn more, give us a call.

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