IMF rings alarm bells over corporate debt

Business | Andrew Wong 15 Apr 2019

I spoke to my company's fund manager last week and we both agreed there was room for global stock markets to rise. At the same time, the reason why Hong Kong stocks are rising is because the market players are not yet done. However, volatility will increase.

The reason for stocks to rise should be their low values compared to European and American markets. However, what we need to pay attention is that low valuation is an excuse rather than a reason, because the market thinks the average price-to-earnings ratio for Hong Kong stocks is lower than that of European and American stocks.

PE is an important reference index for investors to analyze stock market valuations' highs and lows, which may rise and fall sharply in an instant.

The argument that the stock market has not yet reached its peak no longer holds water. On the contrary, if the market does continue to rise, why is this regarded as unreal?

The 2007 peak was driven by sub-prime issues in the United States, while the 1997 peak came on the back of an attack on regional currencies.

A collapse of Sino-US trade talks is certainly a possibility, but the bigger underlying issue is that the problems of global financial institutions - caused by the US sub-prime mortgage crisis in 2007 - have not been resolved or have even worsened.

Last week, the market seemed to shrug off an International Monetary Fund report which said that the global economic system was almost broken and high debt levels among enterprises were very common.

If there is no financial crisis, countries all over the world should be able to cope with a mild slowdown, but high levels of borrowing among enterprises have made the global economy more vulnerable.

In other words, the IMF is saying that global corporate debt could trigger a crisis. In fact, a global economic slowdown is obvious and this will impact on the leverage on the high side of the company. What is more dangerous is the profitability of many enterprises is declining while their debts are rising.

This means many enterprises will not be able to reduce debt through profit, and will have to maintain operations through debt repayment.

Most worrying of all is that the IMF notes that United States and China are particularly vulnerable to corporate debt while in Europe, the financial fragility between highly indebted sovereigns and banks is also of concern.

The IMF report shows that neither quantitative easing nor tax cuts can resolve the global economy's underlying problems. So if there is another financial crisis - triggered by corporate debt - how will governments and central banks tackle it?

Will the utility of QE still be believed in? Can money be trusted if it is printed in large quantities? Maybe now is a good time to invest in gold.

Andrew Wong is chairman and CEO of Anli Securities

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