Evergrande: A timely reminder about risk
Do you have enough to Retire?Free Retirement Plan Health Check
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.
So, what will the fallout be and how will it impact on the portfolios of pre-retirees and retirees?
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. Start by investigating how your super is invested and the risks you’re really taking on.
With share markets at near record highs, and memories short, Evergrande provides a sobering reminder of the risks pre-retirees and retirees must manage.
Keep in mind, there are ways investors can manage risk and build certainty for the future. But the strategies are different as you approach retirement, because you need to start planning for spending.
At When Financial Solutions we employ a framework that is designed to balance your short-term and long-term risks, so you can confidently spend today.
It’s why when you choose When Financial Solutions it’s not a matter of ‘if’ you will enjoy confidence in retirement, but ‘when’.
Michael Bowman and James McMaster are co-founders of When Financial Solutions. This article is general and does not consider your personal circumstances so it may not be appropriate to you. If you would like advice specific to you, please give us a call.