Sept 14 Asia Ex HK/China +VE FT China on Alipay, The Pru, Walls, Soho & The Cult of Xi.

14 Sep

This and previous notes can be found at  Substack ( Asian Market Sense )
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Market dipped in early trades down to 7,390.  It then saw choppy trading; bounced to 7,414, dipped to 7,400 bounced to 7,424 then back to 7,390 before rallying to 7,430 and currently flat.  Energy and Gold names +VE but Iron Ore prices seeing continued weakness.
Brambles as 2 day investor briefing get underway. Zip weak on saying it would accept crypto Afterpay also weak. Vulcan Energy trading halt; its launching a placement to fund exploration initiatives and expand its dual renewable energy and lithium development strategy.
House Price Index Q2 +16.8% YoY vs +7.5% Q1 (F/cast was +9%)
House Price Index Q2 +6.7% MoM vs +5.4% Q1 (F/cast was +5.8%)
Nikkei opened higher but dipped slightly in early trades to 30,504 before rallying to test 30,800 only to sell down heavily into lunch 30,560 level.  PM opened slightly higher and trading sideways,  currently +146pts (+0.5%) @ 30,594
Topix traded in a similar pattern currently +13pts (+0.6%) @ 2,110
Leaders Insurers, Oil/Coal, Shippers and Auto
Laggards Utilities, Pharms and Metal Products
Volumes remain reasonable, earnings in focus.
Industrial Production Jul -1.5% MoM vs +6.5% Jun (F/cast was -1.5%)
Industrial Production Jul +11.6% YoY vs +23% Jun (F/cast was +11.6%)
Capacity Utilisation Jul -3.4% MoM vs +6.2% Jun (F/cast was +1.4%)
S Korea 
Kospi opened higher after two down days and worked higher through the session currently +28pts (+0.9%) 2 3,156
Kosdaq traded in a similar way; currently +11pts (+1.1%) @ 1,037
Tech being bought by Foreigners and Local Institutions.
Tourism names rallying ahead of Chusok and re-opening theme
Laggards Steel, Apparel, Pharma, Platforms
Google fined $177m for abusing android.
KDCA announced 1,497 new covid cases (+64 DoD)
Export Prices Aug +21.6% YoY vs +19.5% Jul revised
Import Prices Aug +18.6% YoY vs +17.4% Jul revised
Taiex opened higher tested 17,530 a few times in the first 40 mins but failed to break out and then sold down to 17,425 and traded around flat until around 11:30am when it worked better to 17,500 only then to ease back Currently +18pts (+0.1%) 2 17,464
Laggards Shipping/Transport, Pharms and Property
Leaders Utilities, Energy, Consumer and Financials
CSI 300 opened lower and tested down to 4,960 level in first 15 mins then worked better to 4,995 only to sell back down into lunch at -15pts (-0.3%) @ 4,977
CATL testing higher on news of new investment into a lithium battery plant. Huawei Harmony +VE as users exceed 100m
Leaders Pharma, Battery, CyberSec.
Laggards Coal, Metals and Brokers
Pre market opened @ 25,828 +13pts vs +5pts ADR’s but quickly reversed down to 25,636; margin call selling combined with weakness in Evergrande and Apparel names (after Nike d/grade) and some Ecommerce names before rebounding back to flat only to sell down again to 25,730 before working better into lunch -13pts @ 25,800
Leaders Phama and Energy
Laggards Consumer Staples, Property, Financials
Expect caution with UK employment data due and ahead of US inflation data.  Futures indicate FTSE 100 +4 pts at 7,072, DAX +34 pts to 15,735 and  CAC 40 +10 pts to 6,687, according to IG data.
US Futures
Opened Dow +75pts, S&P +0.2% and NDX +0.13% but expect caution ahead of the US inflation reading.

Front Page
Texas called up to culture wars  Looks at the reaction to the new abortion law that was passed last week.

China wants to split Ant’s Alipay in fresh salvo of tech crackdown
• Beijing seeks separate app for lending units • User data to be turned over to joint venture
Monday’s big story key is that splitting up the company hurts both its value and its ability to operate. I still think one of the main aims was to get hold of the user data as a prelude to a new tax regime in China. Government believes that a lot of income goes unreported and is keen to tighten up on that. Another big negative is government officials being involved in the running of a company are unlikely to have the same vision as entrepreneurs.
The article mentions that control of data being a key issue; this week’s Economist has an article on that issue; ‘Codified crackdown’ which covers the issue and also mentions how the government is making platform operators write code that will promote content that the government likes and inhibit that which it does not. Moreover tech firms going forward are expected to protect national security and public order. Going forward the Ecommerce stocks are not going to be able to command the same profits; Meituan is going to have to spend a lot more on workers rights and benefits etc. In that sceanario I think Tencent’s strategy of investing in and backing starts up could well prove a useful source of income in the years to come.
Also LEX Alipay: controlling capital  ‘Mr Market has found a new home in Beijing. Benjamin Graham’s allegory, which describes an irrational investor led by their emotions, explains the uneven shareholder response to China’s relentless regulatory crackdowns.’
Concludes ‘Beijing’s leaders want more control over the “new economy” leaders. For now, market valuations do not invite a contrarian stance on China. It is best to wait until Mr Market quiets down.
But there are already signs that bargains have begun to appear.’

OECD seeks to avert trade wars with global scheme for setting carbon price.
Paris Club trying to set up a plan to set global prices which will be important for scheme to work. Worth a read because there a range of issues that could hamper its working including protectionism.

Prudential’s China pivot ignores warnings from Soros and Wood
Looks at how Prudential is set to follow the lead of HSBC and Standard Chartered Bank in being UK based but dependant on Asia for growth and profit. An interesting read but I think a little unfair as these moves had been in the planning for years and changing tack would be difficult. The more interesting point will be how it adapts to the new policies in China. I think it should do well as Beijing aims at common prosperity then helping individuals with savings and pensions should fall into line with Government aims which will be crucial to success.

China titans forced to tear down walls
Beijing orders Tencent and rival Alibaba to stop blocking interoperability.
The walls are coming down the article suggests that this will lead to a drop in profitability and reduce the incentive to take stakes in start-ups in order to build closed ecosystems; which it could do. But there is also the potential that it will make the firms more considerate in the start-ups they buy. It could also make them strive to provide better service to clients in order to attract more business to their platforms rather than just making suppliers ‘decide one from two’.
One thing that seems certain is that they will not be dragging their feet in implementing the new arrangements. Then their success will be in the hands of the users.

Blackstone deal collapse leaves Soho China bruised
Soho China’s stock plunged 40% on the news that Beijing was not going to give approval within the required timeframe.
I think that is a clear sign that Property is no longer a key pillar to the development of China. As I have written before China has over the past 30 years upgraded its property stock to first world standards. It is now keen to down play property; save for it being for living in; as President Xi has said a number of times. I think that having Blackstone owning property would also go against the current policy.
China is much more interested in getting investment money that will help it develop advanced manufacturing as it seeks to put its economy on an almost ‘cold war footing’ in its battle with the US.
Also in the spotlight are the founders of Soho China Pan Shiyi and Zhang Xin who have come under criticism from social media. Being accused of wanting to flee with their money. That raises another interesting question of how many of the wealthy in China are looking to try and leave in the light of the new ideological premise being set out by President Xi?

Supply chain woes trigger troubling winds of stagflation By Mohamed El-Erian  
He notes ‘The phenomenon in play is evident in macroeconomic data and corporate signals. Producer price inflation is soaring around the world.
Sizeable gaps have emerged between factory orders and output. Transportation costs from China to Europe and the US are 7 to 10 times higher than they were a year ago. More firms in more sectors are supply-constrained.’
His key point is that the disruptions are not a transitory as many have been saying they are. Some are more permanent.
That he feels means the inflation already in the pipeline is likely to lead to the sort of stagflation seen in the 1970’s.
He concludes ‘The dominant structural theme post the financial crisis — that of deficient aggregate demand — has given way to frustrating supply rigidities. They are not going away soon.
It is so much better for companies and policymakers to adjust now. Containing further disruptions is cheaper and easier than having to clean up the damage.’
Well worth a full read.

Xi’s personality cult is a danger to China  By Gideon Rachman
Compares the current proposal to have children from 10 years old being given lessons on Xi Jinping thought and to understand that ‘Grandpa Xi Jinping has always cared for us’ to that of the Mao cult and consequential ‘Great Leap Froward’ and ‘Cultural Revolution’. He says ‘the combination of a personality cult and Communist Party rule is usually a recipe for poverty and brutality.’
He notes that the Xi model is different from the China model put in place by Deng; who sought to put in guards against personality cults. Probably because he had personally suffered under it; ‘Policy should be guided by a pragmatic observation of what works, rather than the grandiose statements of Chairman Mao.’
Key being the potential for Xi’s plans to go wrong or result in unintended consequences for China: ‘Intimidating Taiwan could lead to a needless confrontation with the US. Cracking down on big tech could frighten entrepreneurs and hobble the private sector.’
One big reason is that people cannot openly object as the leader id presumed to be wiser than anyone else. He notes ‘Chinese critics of Xi’s handling of the Covid-19 pandemic have been sent to prison. There will be no public inquiries or parliamentary hearings into the pandemic in Xi’s China.’
The teaching of Xi thought is actually for everyone not just children. But what happens when he is too old to govern? Will he know when to stand down?
He concludes by saying ‘But the US has checks and balances, which have so far managed to thwart Trump’s worst instincts. In a country such as China — without independent courts, elections or a free media — there are no real constraints on a leadership cult. That is why Xi is now a danger to his own country.’

Alipay: controlling capital  ‘Mr Market has found a new home in Beijing. Benjamin Graham’s allegory, which describes an irrational investor led by their emotions, explains the uneven shareholder response to China’s relentless regulatory crackdowns.’
Concludes ‘Beijing’s leaders want more control over the “new economy” leaders. For now, market valuations do not invite a contrarian stance on China. It is best to wait until Mr Market quiets down.
But there are already signs that bargains have begun to appear.’
Apple: Epic fail
Looks at the outcome of the recent court case; which both claim to have won.

For Interest
Wall Street automates to retain young talent
Goldman and rivals promise junior employees ‘more of the meaningful, less of the menial’ An interesting read about taking the menial out of the junior roles. That said, some of those tasks can prove to be useful. Understanding the valuation modelling is important to the job along with learning where to find information.

Walmart news hoax briefly boosts litecoin
Looks at the false claims yesterday, that were later denied but lead to a strong rally in litecoin.

Carmakers close plants and grapple with order backlog as chips shortage drags on 
Millions of vehicles are lost to the semiconductor squeeze, while shipping and supply chain crisis adds to woes. No really new insight just a reminder that the shortage of chips to the automotive industry globally is likely to an impact for many months. It also makes the point that the drop in car sales and suspension of plants will hurt overall GDP.
It says ‘Car groups have already been pushed to the back of the queue by the tech and telecoms companies, which need more advanced and expensive chips that make the semiconductor companies more money.’ That is only part of the story; auto chips are more expensive to make because they need a durability not seen in other equipment. They need to withstand the extremes of temperature and weather that very few of pieces of equipment have to withstand. Plus because cars carry people and chip failure can be life threatening a much higher spec. Key going forward will be both better communication from the auto makers about their production expectations but also a better estimation of require stock levels and that will probably mean greater investment in stock which will be another pressure on margins.

Active funds drive ETF inflows past 2020’s record high

Enthusiasm for the low-cost vehicles accelerates as assets more than double from 2018
An interesting read, especially as more managed fund managers are launching actively managed ETF products

The UK government must act to protect Arm By Ken Costa co-chairman of Alvarium Investments and professor emeritus of commerce at Gresham College.
Well worth a read.

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