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NEW YORK -Investors unnerved by the fallout from heavily indebted Chinese real estate company Evergrande were gauging the potential for a wider shakeout after a selloff hit stocks around the world.
For now, many U.S.-based investors believe there is little chance that the woes of Evergande, China’s second-largest property developer, could morph into a systemic crisis reminiscent of the 2008 collapse of Lehman Brothers.
Still, with valuations on U.S. equities stretched on a historical basis and an unwind of the Federal Reserve’s easy money policies looming, some worry that a sudden drop in risk appetite could leave global markets vulnerable to a broader selloff.
"We have a very cautious view on the market given elevated valuation levels," said Rob Romero, portfolio manager at Connective Capital, a technology hedge fund with $100 million in assets under management. "It is hard to know how far the contagion will spread. We are looking for signs of resilience in U.S. market; if that doesn’t happen, that means contagion has more risk to snowball."
The concerns over the extent of Evergrande's reverberations through the global financial system come at a time when high valuations in the equities markets had many investors and analysts calling for a pullback.
The benchmark S&P 500 traded at 21.6 times forward earnings as of Friday, near its highest levels since the late 1990s dotcom bubble, and prior to Monday's trading had rallied more than 18% for the year to date.
While Evergrande's woes have been playing out for several months, its shares tumbled more than 10% on Monday as Chinese regulators warned that its $305 billion in liabilities could lead to widespread losses in China's financial system if its debts are not stabilized.
Late payments by the company could trigger cross-defaults.
Worries over a broader default spread around the world, with the MSCI Global down 1.62%, on pace for its worst performance in two months. Investors rushed into havens such as Treasuries, taking the yield on the benchmark U.S. 10-year to one-week lows, while the 10-year U.S. interest rate swaps over Treasuries stood at their widest in almost six months.
In another sign of concern brewing in money markets, analysts cited the three-month Libor, which rose to 12.5 basis points, a four-week peak, reflecting worries over potential stress in the global banking system. [L1N2QM1UV]
At the same time, there appeared to be few signs that institutional investors took an overleveraged position in Evergrande that would spark a liquidity crisis, said Robert Sears, chief investment officer at Capital Generation Partners.
"So far most of the negative action [has] been in the Chinese property sector," he said. "I don’t think this has had a major impact on most hedge funds so far."