It is estimated that up to 25% (estimates vary from a low of 10%, which is still high!) of China’s GDP is from residential real estate and its related industries, so with one of the nation’s largest real estate developers, Evergrande Group, struggling to meet its debt obligations, investors are wondering what the ripple effects may be if this very large conglomerate is allowed to unwind in a controlled bankruptcy.

China has a history of vacillating between providing and pulling support for companies and/or industries, and whether it keeps a company alive or lets it flounder has everything to do with the central government’s prevailing economic and social goals. Will they allow Evergrande to move to bankruptcy as a way to send a message to market participants about moral hazard, i.e. you can lose money and investing has risks because the government won’t always intervene to bail you out.

In our mind the question for investors is: How does this affect me and my life and my accumulation and/or retirement plan? We think a few concepts are key to remember here.

1. If it is not Evergrande, some event will be the catalyst for market volatility at some point. And we all know that the market goes from shrugging off bad news to then reacting to it. This is normal.
2. Will Evergrande be a contagion? At this point, based on the size of the debt issues, this appears to not be the case, yet we all know that where there is one rotten apple there might really be two or possibly more. So it is possible that there are some ripple effects beyond Evergrande that will be the source of market volatility.
3. What should an investor do in response or to be proactive? Since it is possible that the reactions are contained and China does what needs to be done to calm fears and losses, the best course is personal but will largely depend on your answers to the following questions:

• Do you have enough cash for your next two years of spending if you are retired?
• Is your portfolio invested in quality companies that can weather normal course corrections?
• Do you have speculative holdings that should be trimmed or closed out?
• Do you have cash to invest that should be deployed if there is weakness?

We will not know for sure how Evergrande will unfold until after the fact. Yet, at this point, it appears Beijing will do its best to limit damage. Regardless, we think the key is to think about the companies we own - will this or any other event affect the 10 year earning power of the Canadian banks, grocery stores, pipelines and utilities in our strategies? We think not and believe that in spite of world events, investors should continue to stick to their well thought-out and sound investment plans.

We always welcome your questions

Randy, Ian, and the team at R&R Investment Partners