Aug 17 Asia update & FT Afghanistan, China slowing, financing. Japan hostile M&A.

17 Aug

This and previous notes can be found at  Substack ( Asian Market Sense )
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Market opened lower and has trended lower through the session; currently -86pts (-1.1%) @ 7,496.  Partly due to a number of key stocks going ExDiv today along with a number of companies trading lower after earnings; Sims Metal, Breville, Santos, Dexus, Sezzle, ARB, and Magellan. BHP -1.4% down at $51.33  ahead of its earnings report this afternoon. CBA lower; ex Div and misconduct news.  
Oil names lower on demand concerns after the weak China data, but gold and iron names +VE A2 Milk opened strong on M&A hopes with talk Nestle looking but sold off after spiking at noon.
RBA minutes taken in the stride of the market.
Laggards Financials, Materials
Leaders Communication Services and Industrials.
Government extending its State of Emergency.
Nikkei opened higher rebounding from Monday’s sell down and initially  spiked to 27,750 but then sold back down to 27,630 and then trended lower 27,540 before a small bounce into lunch.  PM opened lower and trading around flat; currently +11pts (+0.04%) @ 27,544  
Topix traded in a similar pattern currently -2pts (-0.1%) @ 1,923
Very low turnover; Oban effect. Tokyo Electron +VE post results, Gungho Online strong on share buyback, Ajinomoto +VE defensive.
Asics weak; post Olympic selling. Freee KK continued selling post earnings. Mazda announced; halting production at 2 plants due to heavy rain.
S Korea 
Government announced 1,373 new covid cases and that 44.9% of the population have had at least one jab.
Kospi re-opened lower tested higher but only to 3,180 level then trended lower through the morning with support at 3,135 level around 12:30 and then started working better. Currently -26pts (-0.8%) @ 3,144
Foreigners remain sellers. Insurance and Healthcare +VE. Weakness in Battery plays after a fatal NIO ES8 crash.
Kosdaq traded in a similar pattern; currently -22pts (-2%) @ 1,019
Taiex opened slightly lower and tested Monday’s closed but failed and then trended lower, some support around 16,800 but that failed around 11am and currently trading around 16,750. Light T/O continues. Index has broken below both the 60 DMA and 120 DMA key supports and prompting further technical selling. Foundry names +VE but Paper and Cement the laggards.
CSI 300 opened lower but initially spiked to 4,967, hopes the PBOC will announce another RRR cut. But without any news it then reversed back to flat. Small bounce and traded sideways before selling down into lunch. -19pts (-0.4%) @ 4,922. NPC underway. Concerns raised mid morning as China announces it will ban unfair online competition by technical means. Highlights more regulatory concerns. News the Govt has a stake in ByteDance means it could set a template for future tech listings.
Interesting to see SEC Commission Chair Gensler warns that American’s don’t know about some of the Chinese companies listed in the US as Blackrock suggests investors should add to their China weightings.
Pre market opened @ 26,138 -44pts vs -74pts ADR’s Initially sold down with ecommerce under pressure. Market traded 26,070/200 for most of the morning but then news of extending quarantine measures and the draft bill on unfair online competition by technical means prompted the selling.
Leaders AIA and Sunny Optical on earnings. Laggards Tencent (reports tomorrow), HKEX.
Expect a weak open key will be the Eurozone data
GDP growth, Construction and Employment data.
US Futures
Opened slightly lower Dow -24pts, with S&P and NDX also lower.
Expect caution ahead of Retail Sales and Powell speaking.
Ahead Retail Sales, Redbook, Industrial Production, Manufacturing Production, Capacity Utilisation, Business Inventory, NAHB Housing Market, Fed Chair Powell speaks, API Crude Oil Stocks. 

A lot of focus on the US withdrawal from Afghanistan.  Harsh though it is Biden is probably right that the country has had 20 years to resolve its internal government leadership.  Now it will be a matter of  watching to see what happens.  Whilst the taking of Kabul has been peacefully done that was not the case in some of the provincial cities.
Governments can still influence what happens and seek to protect rights. Everyone is probably hoping that it does not become a breeding ground for terrorism. China has a lot at stake in terms of protecting its existing investments and seeking further access westwards but it is concerned about the potential of jihadists especially those from Xinjiang. Most expect that in return for investment and recognition from China the Taliban will distance the East Turkestan Islamic Movement, a Uyghur militant group that Beijing alleges is a security threat. The US says the group is no longer in existence.
Worth noting that the Taliban’s income once focused on the drug trade is now focused much more on taxing transit goods and fuel; showing an increased administrative power.
Also worth noting that whilst those in Kabul may be indicating a more liberal stance towards women; their educations and ability to work; that reportedly is not the case in the provinces.
There is unlikely to be a swift resolution. It will be interesting to see the impact on Pakistan who has had the longest links with the Taliban.
Opinion Afghanistan is now part of the post-US world  By Gideon Rachman worth a read; highlights the benefits to China as long as the Taliban doesn’t attempt to export violent Islamist fundamentalism.  

Delta variant and floods stoke concern over faltering China growth
The reasons given for yesterdays poor data and those are likely to impact the August data too. The question is whether they were already slowing and are less sensitive to covid, which is what some are saying. Last month we were surprised by the RRR cut but it would appear the PBOC had better sight of the situation than most. The question now is whether we get further RRR cuts. Most agree that is more likely than rate cuts.
We are also seeing FY growth being downgrades, especially with the closure of the Ningbo-Zhoushan port. Which in addition to hurting China will have global implications too.

Takeover shows Japan Inc is not always on the side of investors
Reviews the case of Murakami’s hostile take over of JAG.
‘After 20 years of effort, Murakami has demonstrated that Japanese boardroom resistance can be illogical and inimical to shareholders, that the value buried across corporate Japan will not unlock itself and that the first offer that comes along is not always the best one.
He may not have changed the market, but he may have begun a reappraisal of who the bad guys are here.’
Worth a read, which probably explains why Japan so often disappoints.

HSBC snaps up Axa’s Singapore business
Looks at yesterday’s announcement. HSBC seems to be trying to develop a second hub as it is caught in the cross fire between China and the US in Hong Kong. Wealth management is the key driver for most of the banks currently and Singapore is increasingly being seen as a better hub as the US/China relations remain fraught. Especially as it is expected that the NPC will impose anti sanctions legislation upon Hong Kong which could out some companies in an awkward position.

China entrepreneurs wary of dollar financing
Red tape creates growing preference for renminbi as Beijing’s sweeping tech crackdown changes investor calculus. A good read
Many start-up’s have, for some time, been aware of the governments concerns about the “variable interest entity” (VIE) structure which for many of us has only recently been highlighted as a means of enabling companies to engage foreign investors.
The article notes that in August so far there were 23 renminbi raising’s and no US dollar ones.
The current review of the VIE structure has many investors worried. Some think that USD raisings are still practical as long as Hong Kong remains available as a listing venue.
Whilst current USD funds will probably be deployed it does raise the longer term question of whether there are enough local funds for all the potential ventures if the USD is marginalised. It notes that sensitive areas like semiconductors, biotech and aerospace have historically been renminbi funded but over the past 3 years; 70% of internet start up’s raised USD. It also highlights that the government has run a number of seminars to explain the options for dismantling VIE structures.
Another plank to China’s desire to be free of the restrictions of the USD. But you have to wonder if there are enough funds for everyone or whether China will end up missing out on some great ideas for the lack of funding. Alibaba and Tencent are true world leaders and have benefited from the previous structure. It would be a shame if the future developments were curtailed due to the lack of funding.

BlackRock urged to lift China allocations
The group is saying that ‘China should no longer be considered an emerging market and recommended investors boost their exposure to the country by as much as three times.’
It is based on the fact that China ‘has the second-largest equity market, the second-largest bond market.’ But coming at a time of raised tensions between China and the US and as Beijing shows it can redraw the investment rules at short notice.
I think that a lot of investors are reviewing their China investments on the basis of increased political risk. Whilst the markets are large they are not mature and the government has demonstrated that its wishes are paramount over investors. On that basis alone I would remain cautious.
Worth remembering that Blackrock recently got permission as a foreign asset manager to launch it own wholly owned mutual fund business…. so may have a vested interest in talking up the allocations.

For interest
Era of ETFs dawns in global contest with mutual funds
By Robin Wigglesworth.
Looks at how successful and useful ETF’s are but also notes that the Mutual Fund is not yet a dodo. Worth a read.

Poland’s plan to kick its coal habit
Warsaw’s new proposal to invest in nuclear power reflects the stark choices faced by EU states under pressure to meet the bloc’s ambitious environmental goals while keeping the lights on at home.

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