Thursday, October 1, 2015

1/10/15: Emerging Markets Debt v Equity

Debt, not equity, is the real China Fault Line, even if tremors are rocking its stock markets:

What we have in the above is a record of debt/equity in corporate valuations across the EMs and China. While debt pile relative to equity valuations has grown in the EMs ex-China (though it still sits below parity), in China, growth in debt has been exponential. Inly in 2007 did Chinese debt/equity ratio come close to parity (albeit from above 1) and ever since, debt growth outpaced expansion in equity valuations.

Bad enough. Except when one considers an even more dangerous side to this markets: debt growth likely led equity valuations. Which implies, if confirmed, that Chinese markets investors have simply ignored debt valuations in their balancesheet pricing of Chinese companies. In other words, straight out of Krugmanite book (for countries), 'debt doesn't matter'.

Good luck with that...

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