The Weekly Stack 12th to 18th August

18 Aug, 20234 mins read
The Weekly Stack 12th to 18th August

🏠 China’s property crisis might drag everyone down

📈 India's retail inflation surges to a 15-month high

💔 Deloitte to Resign as Auditor of Adani Ports

Read Time: 3 mins

1. China’s Woes could hurt us all

China’s woes could hurt us all
China’s woes could hurt us all

China’s property crisis sends shockwaves across the globe

China's real estate giant Evergrande has filed for bankruptcy protection, becoming the latest victim of the country's property crisis. The company, which is one of the world's most indebted developers, has been struggling to repay its debts for months. In December, it missed a payment on a $148 million bond, triggering a default. Sino-Ocean Group, a state-owned property developer had failed to pay interest of $20.9 million. Sino-Ocean’s debt problems will worsen the home market sentiment as many homebuyers will delay their purchase plans.

Suitability (age)
18-39 Years
40-60 Years
>60 Years
Key Characteristics
  • Growth & Capital Appreciation
  • Wealth Accumulation
  • Risk-Adjusted Returns
  • Outperform FDs & Inflation
  • Steady Returns
  • Beat Inflation

Asian stocks fall as investors fear China's property crisis

Asian stocks are set for a third week of losses as investors remain concerned about the economic outlook in China and the prospect of rising interest rates in the United States. The Shanghai Composite Index fell 0.3% in early trading, while the Hang Seng Index in Hong Kong was down 0.2%. Japan's Nikkei 225 index was flat. The declines in Asia follow a sell-off on Wall Street on Friday when the S&P 500 index fell 0.8%.

Home prices in China are on a steep decline

The country's property market has been in a slump for months, and the effects are starting to be felt across the economy. Home prices have fallen by double digits in some cities, and developers are struggling to sell their projects. This has led to job losses in the construction sector and a slowdown in economic growth. Investors are worried that the Chinese government will have to step in to prop up the economy, which could lead to higher inflation and interest rates.

Our Opinion: The interplay between nearly 30% of China’s GDP is linked to real estate activity and a staggering 50mn homes lying unoccupied forms the crux of the property market crisis in China since 2021. During this period, several over-levered developers have ultimately gone bust. It is widely anticipated that the Chinese central government will have to ultimately step in to ensure state-funded bailouts of struggling players and ensure that the stress does not snowball into a full-blown economic crisis in the future.

2. The Inflation Alarm is Ringing

The inflation alarm is ringing
The inflation alarm is ringing

Food inflation drives July CPI to 15-month high

The Consumer Price Index (CPI) inflation in India surged to 7.44% in July 2023, the highest level in 15 months. This was driven by a sharp rise in food prices, which rose 11.51% in the month. RBI has been raising rates gradually since May 2022 to cool inflation, but the latest data suggests that more rate hikes may be needed.

Inflation to remain elevated in coming months

The RBI expects inflation to remain elevated in the coming months, but to gradually decline towards its target of 6% by the end of 2023-24. The central bank has said that it will take all necessary measures to ensure that inflation remains within its target range.

Our Opinion: The recent spike in Inflation is probably nothing much to worry about as yet given that it has been largely led by a spike in Vegetable & Cereal prices due to heavy rainfall in July. These figures are very likely to cool off going into the next few months as prices settle. The government also has a few measures in place which could include cutting taxes on petrol/diesel prices amongst other things to quell inflationary forces.

3. Deloitte resigns as Adani Ports’ auditor

Deloitte resigns as Adani Ports’ auditor
Deloitte resigns as Adani Ports’ auditor

Auditor Flags Concerns

Deloitte, the auditor of Adani Ports and Special Economic Zone (APSEZ), has informed the company that it will resign as auditor with immediate effect. The resignation comes after Deloitte raised concerns over certain transactions flagged in the report of Hindenburg Research. The auditor said at the time it couldn’t verify Adani’s claims and couldn’t determine if the business was fully compliant with local laws.

This resignation highlights governance concerns

The company has been accused of using related party transactions to inflate its profits. The resignation of Deloitte is likely to further increase the scrutiny of Adani Ports by regulators and investors. Adani has repeatedly denied any wrongdoing and a panel appointed by India’s Supreme Court found no regulatory failure or signs of stock price manipulation.

Our Opinion: The Adani Ports-Deloitte incident serves as a catalyst for an important discussion surrounding the extent to which auditors should verify related party transactions and take up group company audits in conglomerates. While transparency, disclosure, and accountability remain paramount, auditors must strike the right balance between their involvement and maintaining their independence. It is imperative that auditing practices remain aligned with established regulations and standards, reinforcing the integrity of financial reporting and corporate governance.

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