I came into our latest mini Black Monday with a large net short position in my global equities portfolio and thus feel vindicated, because I had warned my friends on LinkedIn (https://lnkd.in/d6Dy3rEC) to beware a post Labour Day hit on major US equities indices.
In fact, I had given 10 reasons why the US stock market was primed to tank and one of these reasons was a potential corporate default on Evergrande’s $300 billion in liabilities, my bearish angst paid off big. Now that Papa Bear has given long bulls a kick in the derrière they will not soon forget, I am cashing in my net short trades for the most profitable day I have had in 2021. What next?
The old Street axiom that markets go up like an escalator but go down like a demented elevator was proven true today in New York. I doubt if Evergrande will be allowed to fail by the Politburo and thus trigger a systemic meltdown in the Chinese state banking system. In fact, like HCA and Fosun before it, Beijing will use its $3 trillion sovereign wealth fund assets to bailout Evergrande. Note that the property developer’s share price is down 85% in 2021 and its high yield debt is trading at 25 cents to the dollar, so the news that it has injected HIV into its balance sheet bloodstream (a common disease for property developers as any investor in the Gulf should know from bitter experience) is not exactly unknown to Wall Street.
Evergrande is no threat to systemic risk in US banking. So I cannot see why the financial markets are priced for contagion risk. This is the reason, I have covered my shorts and I am now using the spike in volatility to put on (“I… love to love you baby” RIP Donna Summers) put options sales on my favourite stocks and sectors. President Xi has made me a lot of money in 2021 via shorting Ali Baba after bailing out on my nervous long position at 227 and thus is my favourite dictator. Paki Hindi Cheeni bhai bhai.
There is a time for fear and there is a time for greed. With the VIX at 26, this is not the time for fear. This is the time for greed, albeit tempered by a strategic sector growth prism in US equities and as always risk management discipline. For now, I will avoid China and all emerging markets even though I am itching to bottom fish the Brazil ETF below 30. The land of samba, lambada, Ronaldo, Ipanema Beach bewitched me from the first moment I stepped foot in Rio de Janeiro in my twenties. Story of my life from Rio to Jio LOL!
Chief Investment Officer at Asas Capital