Why we must be concerned about 'grey rhino events - James Rowbury

As a consequence of the COVID-19 pandemic, Western markets are more aware than ever of ‘black swan’ events

These events are hard to predict, rare and beyond the realms of normal expectations.

In China, they are more concerned with what they call ‘grey rhinos’ which are large and visible problems that are ignored until they move fast.

Sign up to our Business newsletter

A good example of a grey rhino is China Evergrande Group, which missed making a bond coupon payment earlier this month, when its thirty-day grace period ended. Fitch was one of the first rating agencies to declare that Evergrande’s overseas bonds were in default after the missed payment.

As a consequence of the COVID-19 pandemic, Western markets are more aware than ever of ‘black swan’ events, says James Rowbury,

Prior to the payment deadline, Evergrande revealed that it would struggle to repay a previously undisclosed guaranteed obligation of US$260m and after the announcement stating their

inability to continue to perform its financial obligations, the company declared that it plans to actively engage with offshore creditors to plan a viable restructuring plan.

Hours later, Evergrande’s chair was summoned to a meeting with Chinese government officials. As the situation continued to unravel, the company announced that a new risk management committee had been established. Hui ka Yán, the founder and chairperson of Evergrande, is officially the chairperson of this seven- seat committee comprising members from large state-controlled companies.

The Chinese government has taken control of other heavily indebted companies through similar restructuring mechanisms in recent years, the best example being HNA Group, which was effectively taken over by local government officials early this year

In the UK, fast-fashion retailer Boohoo has warned that its sales growth and profit margins will be lower than expected this year, resulting in a slip in its shares. The company pinned the blame on higher rates of items being returned and pandemic supply chain bottlenecks inflating costs.

Boohoo now expects net sales growth of 12% to 14% for the 12 months to February 2022, down from previous guidance of 20% to 25%. The company expects a reduction in profit

margins at the level of adjusted earnings before interest, tax, amortisation and depreciation to be between 6% to 7%, down from earlier forecasts of 9% to 9.5%. Although Boohoo’s sales in the UK grew, other markets such as the US and elsewhere saw sales fall in recent months.

Focusing on Yorkshire, Hull-based offsite contractor M-AR has reported a record year, with turnover more than tripling in the previous 12 months. The company materialised a turnover of £20m for 2020/21, compared to £6.2m in 2019, along with improvements in its profitability. M-AR underwent a substantial growth across all areas of the business in 2020/21, which was fuelled by increased company-wide investments.

Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned. The value of

investments and any income derived from them may go down as well as up and you could get back less than you invested.

By James Rowbury, Investment Research Lead, Redmayne Bentley