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The Biggest Asset Class in the World

Remember the US real estate bubble of the mid-2000s? That was nothing in comparison!

Chinese real estate is the biggest asset class in the world. It isn’t a stretch, therefore, to argue that the success or failure of China’s property market influences the global economy. One only has to look at the ripples caused by Evergande’s recent instability to see this.

Both in absolute dollar terms and as a proportion of domestic GDP, China’s real estate sector dwarfs that of the US, even at its mid-2000s peak. Remember what happened to the US and global economy when US real estate went bust during the 2000s? This is why global markets react so violently to any hint of trouble in China.

The Chinese economy and property sector have been weakening for a while now. Data surprises in China have been negative since around June. Negative surprises are now occurring more frequently in the US and EU too.

Why do surprises (both positive and negative) matter? Economic expectations are baked into asset prices, so if a new data point defies expectations the market must adjust up or down to accommodate this new information.

Well, at least your portfolio is diversified across stocks and bonds to reduce shocks created by a Chinese real estate bust, or any other source. Right? Maybe not.

The chart below shows correlation between bond yields and stocks has declined dramatically recently. This means that when stock prices decline so do bond prices.

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