Aug 19 Asia Update & FT Afghanistan, Common Prosperity, Tencent, Geely, Evergrande and more

19 Aug

This and previous notes can be found at Substack ( Asian Market Sense )
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Market opened at the day lows; 7,429 with miners BHP, Rio Tinto, Fortescue, and Mineral Resources under pressure along with Energy names as iron ore and oil fell.  It then slowly worked better through the session.  Earnings the main focus but covid also an overhang.  Employment data  was much better than expected, at a 13 year low helping but its historic and the recent lockdowns will have an impact.
Employment Change Jul +2.2K vs 29.1k Jun (F/cast was -50k)
Full Time Employment Change Jul -4.2K vs 51.6k Jun (F/cast was -34k)
Part Time Employment Change Jul 6.4K vs -22.6k Jun revised (F/cast was -16k)
Unemployment Rate Jul 4.6% vs 4.9% Jun (F/cast was 5%)
Participate Rate Jul 66% vs 66.2% Jun (F/cast was 66%)
Nikkei opened lower but worked higher for the first two hours but with resistance at 27,500 but sold down into lunch.  PM opened lower and trading sideways around the 27,400 level.
Topix traded in a similar pattern, resistance at 1,915, PM trading around 1,910 level.
Concerns about the impact of tapering. Commodities weak hurting too. IT/Tech weakness. Currency back to 110 level and signs of domestics returning to buy ETF’s. Shippers also in focus.
Tankan Index Aug 33 vs 25 Jul (F/cast was 26)
Stock Investment ¥661.8B vs ¥-1103.6B prior
Bond Investment ¥198.8B vs ¥105B ® prior revised
S Korea 
KDCA reported 2,152 new covid cases (+347 DoD)
Kospi opened lower 3,140 but tested yesterday’s close in the first hour but without success and then trended lower. Support at 3,104 level and currently trading sideways around 3,112 level/
Kosdaq similar patter currently trading around 998 level.
Domestic Institutions selling across the board. Foreigners continue to sell Tech. Pharma +VE on covid resurgence, Financials mixed Kakao Bank rallied along with Games.
PPI data due pre market Friday
Taiex opened slightly lower and trended lower through the sesson with support at 16,400. Closed at -415pts (-2.5%) @ 16,411.
CSI 300 opened slightly lower and tested yesterday’s close in early trades but without success and sold down to 4,840 level before bouncing into lunch. PM opened higher and working better currently -12pts (-0.3%) @ 4,882. Restructuring of China Huarong seen as +VE but still the lack of Govt or PBoC stimulus a concern. President Xi’s call for ‘common prosperity’ raises the spectre of the much talked about property tax being imposed -VE Property and Banks. Non-Ferrous names weak as Iron ore and copper turn weaker.
Pre market opened @ 25,787 -79pts vs -124pts ADR’s
Market sold down on expectation of more Govt regulation not just of Ecommerce (Baba hits new lows, Tencent ) but whole private sector. Morning support at 25,400 and PM working slightly better
Auto and Sportswear seeing buying interest. Tencent opened higher but sold down; I still think best in class and well positioned to cope with the new regulatory environment.
WH Group continued weakness after Founders son’s article.
Earnings at lunchtime
BANK OF E ASIA (00023.HK) Short selling $7.24M; Ratio 36.276% Net profit HK$2.671 billion, +74.3% year-on-year. Div announced
COFCO PACKAGING (00906.HK) Short selling $60.28K; Ratio 4.344% net profit RMB249 million, +36.5% yearly. EPS was RMB0.224. Div announced
KERRY PPT(00683.HK) Revenue +62.7% year on year to HK$6.374 billion. Net profit HK$3.773 billion, +251.3% year on year.
EPS was HK$2.59. A interim dividend of HK$0.4 was declared, Underlying profit was HK$2.36 billion excluding fair value change of investment properties, up 113% year on year.
Expect a weak open following Asia with concerns over the impact of tapering.
Ahead Eurozone Current Account Jun (May was €4.3B, F/Cast €24.4B
US Futures
Opened slightly lower Dow -20pts S&P and NDX flat.
Ahead Initial Claims, Philadelphia Fed Manufacturing Index, Leading Index, EIA Natural Gas Stocks, TIPS Auction.

Front Page FT
Afghan people face ‘dire’ financial outlook, warns ex-central bank chief

A lot more on Afghanistan and most of it negative. Already reports highlighting; that whilst the Taliban leaders may be saying what the west wants to hear in terms of respecting human & women’s rights, on the ground there are exectuions and beatings.
US hopes of restricting access to Afghanistan reserves at American Banks in an effort to make sure the Taliban ‘tows the line’ are unlikely to be effective as the Taliban has other sources of income.
Also see
Europe sends mixed messages to Afghans fleeing new rulers
Officials offer to aid locals who helped EU but change tune when discussing refugees
West fears rise in al-Qaeda threat
In 1990s the Taliban gave sanctuary to bin Laden as he plotted 9/11 strike on US
Taliban gunmen break up first show of dissent since takeover and
Mistrust and secrecy present gift to Taliban

Abrupt US exit and unpredictable warlord resistance hand Islamists victory with speed that surprised even them
White House rushes to put evacuation back on track after chaos at Kabul airport
Editorial  Afghan withdrawal is a blow for Nato and Europe
European states have to take more responsibility for their own defence
Also Opinion
Afghan fiasco shows a hollow Global Britain  and
As a woman in Kabul, I dread what happens next By Maryam Nabavi.
Seems we are likely to hear of more human suffering related to the withdrawal.   For investors it will be about assessing whether there is now more terrorism risk in the world and the impact of the expected refugee crisis.

Greens set out Berlin vision

Annalena Baerbock, the Greens’ candidate to succeed Angela Merkel as German chancellor, has called for looser fiscal rules for EU members and a tough stance on China and Russia. 

CME fuels exchange buyout spree with $16bn offer for rival Cboe

• Financial derivatives specialist targets Vix owner • Takeover subject to antitrust approval
Another sign of exchange groups looking to try and achieve scalability.

Xi to clamp down on high incomes
Beijing focuses on wealth redistribution after curbing tech tycoons.
A further insight into what is driving the regulatory changes for Ecommerce and the private sector in general in China.
It notes ‘The committee said the party had allowed some people to “get rich first” in the early decades of China’s reform and opening period but it was now prioritising “common prosperity for all”.’
An interesting move as China is estimated to have 5,279,470 millionaires and over 600 billionaires. The eigth wealthiest man in the world is Chinese too.
The real driver is the weak consumption data, which is prompting the need to increase ordinary citizens wages in order to stimulute domestic consumption so that China can achieve its goal of being less export dependant and more like the US with domestic consumption being a key driver.
The problem is likely to be that as the party takes more control or involvement in the private sector that it becomes less profitable and efficient. That in time there is the potential to derailing growth, profitability and innovation. In effect that the private sector becomes more like the SOE’s than the other way around.
The article mentions about the government taking a stake in a subsiduary of ByteDance. Also for corporates to make donations but most of those go to government backed charity groups with little oversight.
The Economist this week has an article ‘What tech does Xi want’ worth a read, that concludes ny mentioning about, how in 1958 Mao degreed farmers set up furnaces to help China make steel. That resulted not in more steel but pig iron and millions starving as fields went unploughed. It may well be that President Xi’s current calls result not in more common prosperity but wider discord. China for all its strengths is not immune to the law of unintended consequences.

Huawei troubles mask ‘toothless’ US export curbs on Chinese tech 
Looks at how by placing direct restrictions on Huawei the US has impacted that company but the Entity list has not has the same effect on the broader range of companies it covers.
Now as the US looks to review export controls it faces a dilemma: ‘John VerWey, a trade analyst on microelectronics, argues it is China-powered growth that finances the US industry’s ability to innovate and stay ahead of China.’…. ‘the government seeks to balance national security risks posed by China’s acquisition of chip tech with the risk to the US of losing a vital market.’
A good read and interesting dilemma.

Companies & Markets
Tencent warns of bumpy ride as regulatory storm rolls on

• Investors braced for tech crackdown
• Quarterly profits rise 29% to $6.6bn
The key is that there is going to be more control coming and from many different regulatory entities.
All that said it’s going to impact the whole sector. With that in mind I still think that Tencent’s business model is best in class. It takes small stakes in lots of companies and has games for all ages. Its diversity, to me, means that no one area is likely to be a huge drag on the whole company. Going forward it mentioned about advertising likely to be impacted there will be other areas too. Growth in some areas may slow but its diversity means it will remain a key player.

Geely warns of more chip shortage uncertainty.
Numbers disappointed and noted the disruption from the chip shortage. Doesn’t know when that shortages will end but did say they had been stockpiling chips since September; which they feel will give them an advantage over their competitors. I would doubt that will be a huge advantage as I expect most manufacturers have been doing the same. It also suggests that as supplies return to more normal levels, short term inventories will be a higher levels than in the past; which is likely to have an impact on profits.

Evergrande braces for record number of lawsuits
Further bad news for the company but probably reflects how is suppliers are worried about the company’s future which is not a good sign for shareholders. As cashflow and credit get tight is makes for a downward spiral. But the cross read from China Huarong must be that other Developers will be on the hook if the company needs to be bailed out, that should be better news for the bond holders.

For Interest
Borrowing boom triggers warning over corporate default risks
'A boom in US corporate borrowing has laid the foundation for a wave of defaults at financially risky companies, according to debt rating agencies that assess and rank bonds and loans.'
I think that whilst the banks are writing back their provisions there remains a significant default risk remains. An interesting read.

Inflation-protected Treasuries jump to take lead in US bond performance
‘Investors worried about rising prices for everything from consumer goods to raw materials have poured into inflation-protected American government debt, propelling its returns above other major types of US bonds this year.’
Worth a read
Our financial world will be reshaped by transmission revamp By  
Anne Richards Chief executive of Fidelity International.
Looks at how central bank digital currencies will have a big impact on the banking system. Worth a read.

Preparing for the next pandemic
To protect themselves from vaccine nationalism and avoid future shortages some governments have tried to boost their domestic supply chains, only to discover that it is hard to plan for future crises.

LEX US equities/settlement: speed demon
When it comes to settlement times for US stock trades, a Goldilocks pace — fast, but not too fast — should suit the markets best.
Looks at potential changes that have come about because of the hiccup that occurred when trading in GameStop hit extreme levels. It concludes
‘That said, the current system works well. The DTCC’s margin requirement helps ensure brokers have the finances to back the trades they are executing. It was Robinhood’s risk management system that underestimated its liabilities. Rather than turning the room to screw the lightbulb in, try twisting the lightbulb more efficiently.’

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