British bank Standard Chartered is crashing — down 9% on a third quarter earnings miss. The bank saw a 16% drop in profits from the same time last year, and also cut guidance for the second half of 2014, admitting that a major global economic shift is here to stay for a while.
“We remain watchful in India, in China and of commodity exposures more broadly, where we have continued to tighten our underwriting criteria and reduce our exposures,” the bank said in a statement.
“China obviously is going through some pretty radical changes although it’s growing at far faster rates than other economies,” CEO Peter Sands said. “As the economy changes and you have things like the anticorruption drive play through, we have to be very watchful in the way we manage our business and our exposures.”
All of Asia is slowing down, and it’s taking commodities — and as such the rest of emerging markets — down with it. Last week at the Robin Hood Investor conference, legendary investor Paul Tudor Jones said commodities would likely look ugly until 2020.
Obviously that isn’t reassuring to Standard Chartered’s stock price.
This isn’t new stuff. Russia’s been crashing on lower oil prices, and on Monday an Australian CEO warned on what lower demand for steel could do to his country and other major steel producers like Brazil.
It’s about a lack of demand across the region — especially from China.
“What we’re seeing on the ground is a significant reduction in confidence domestically within China as it pertains to building and construction, which is where a lot of steel goes,” Paul O’Malley, CEO of the $US3 billion international steel company Bluescope, told the Australian Financial Review. “Yes there is still growth [which] may well return, but at the moment, the heyday is over.”
For the last few months data out of China has been a whipsaw. Analysts have lowered their GDP growth expectations from 7.5% to around 7.3% or less. In September industrial production had a terrifying flashback to 2008. The property market, foreign investment, and retails sales were all routed.
This is considered a natural growing pain as China shifts from an investment based economy to one based on domestic consumption.
Data has rebounded a bit in October, but there are still major questions about the health of Chinese corporations — they’re carrying a ton of debt while corporate margins thin as demand slows with the economy.
Societe Generale analyst Wei Yao says this calls for some serious corporate restructuring:
“China’s debt problem lies with the corporate sector…. The cure should be capacity consolidation and debt restructuring, rather than another stimulus package targeted to boost investment demand.”
But that’s not what’s happening. Instead, Chinese banks continue to issue corporate loans — volumes were up in October — and the government continues to inject capital into the banks to help them stay afloat until the economy normalizes. The problem is that no one knows quite when that will be.
This is like trying to patch a leaky ship that keeps taking in water as you sail. You know you can make a permanent fix once you get to shore, but no one knows when they’re going to see land.