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An Evergrande bailout could power a tech boom like the LTCM rescue in 1998

  • LTCM was rescued by the Fed as it had borrowed US$120bn

  • The bailout helped drive a 262% rise in the Nasdaq from September 1998 to March 2000

  • A bailout of Evergrande is possible. If so, it may power a boom in EM tech such as the Baby Amazons

An Evergrande bailout could power a tech boom like the LTCM rescue in 1998
Nirgunan Tiruchelvam
Nirgunan Tiruchelvam

Head of Consumers Equity Research

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Tellimer Research
26 September 2021
Published byTellimer Research

As Evergrande unfolds, investors should consider the lessons from a hedge fund that collapsed 23 years ago.

Long Term Capital Management (LTCM) was a macro hedge fund founded by the Nobel Prize winners behind the creation of the Black-Scholes option pricing model. At US$5bn AUM, it would be a middling hedge fund by today's standards, however, it had positions worth US$1 trillion. It had also borrowed US$120bn.

LTCM collapsed in September 1998 when the Russian sovereign default created a contagion that wiped out the hedge fund.

The Fed bailed out LTCM. It provided a US$3.8bn loan fund that helped LTCM liquidate in an orderly manner. Systemic risk to the bond market was prevented.

The LTCM bailout in September 1998 had an unintended outcome. The tech boom – then known as the dotcom boom – accelerated. Risk became the best friend of investors.

The S&P 500 rose 51% between September 1998 and March 2000, after falling 15% in the month prior. The tech-heavy Nasdaq did even better. It rose 262% between September 1998 and March 2000. The Nasdaq increase in that 18-month period was almost 3x that of the previous 18 months.

S&P 500 vs NASDAQ 100

Evergrande bailout could drive a Chinese tech rally...

The LTCM affair may seem like a lifetime ago – Mark Zuckerberg was still in high school.

But there are similarities between Evergrande and LTCM. Evergrande has outstanding debt of US$305bn. At the time of writing, there is uncertainty about the US$80mn interest payment that was due on Thursday. Banks such as Standard Chartered and Morgan Stanley are rushing to reassure investors about their exposure.

There is also the possibility of an LTCM-type bailout from China. On Friday, Bloomberg reported that the Chinese authorities had urged Evergrande to avoid default and complete unfinished properties.

The government has been pumping money into the system. On Thursday it injected US$19bn into the market to shore up sentiment.

The situation is fluid, but an outright bailout of Evergrande could reignite interest in China tech as it would provide a buffer for the market from the authorities. Investors could see an opportunity to take on additional risk, in the expectation that the authorities may bail them out.

Hang Seng China Enterprise Index - Since Mar'20

SSE Medium Enterprise Composite Index - Since Mar'20

...and see a return to the fundamentals of the EM tech story

It also could also benefit broader EM tech. EM tech stocks outside China – such as Jumia and Altimeter – have weakened since April because the market has reacted to the Chinese regulatory crackdown on tech by selling not just Chinese tech stocks, but EM companies too. Investors may return to the fundamental drivers of the EM tech story:

  1. The pandemic has accelerated the growth of EM e-commerce. The overall revenue of the Baby Amazons grew by an estimated 18% CAGR in 2014-19, but accelerated to an average of 34% yoy in 2020. The Baby Amazons’ gross merchandise value (GMV) increased by 34% yoy in the same time period.

  2. The drivers of EM e-commerce have become stronger during Covid-19. Internet penetration in the EM world has leapt forward, powered by cheap data. For example, in India, Jio cut data costs by c97% in 2020. Smartphone penetration is increasing and these devices are now the main means of accessing e-commerce.

  3. The Covid drivers are unlikely to vanish. For instance, in Southeast Asia one-third of digital economy users (such as food delivery customers) have used a digital service because of Covid, according to a survey by Bain Consulting. The same survey indicates that 94% of new digital users intend to continue using the service they have adopted after the pandemic.

  4. The combined value of EM e-commerce firms is currently just 37% of Amazon’s US$1.6tn market cap – in our view, the market is still undervaluing the Baby Amazons.