May 14 FT thoughts China debt, Samsung's advantages, Alibaba #'s , Low inflation taken for granted?


14 May

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Australia
ASX200 market opened higher above 7,000 with strength in Banks, Fortescue Metals, Macquarie Group, and Woolworths.  It then traded sideways around 7,040 for most of the day but slipped lower at the end to close +32pts (+0.5%) @ 7,014  
Treasury Wine +VE on news it will pivot to the US market from China
Japan
High covid cases still a concern
Nikkei opened higher at 27,724 and worked slight better through the morning in choppy trading.  PM opened higher and worked higher to close just off the highs +637pts (+2.3%) @ 28,085
Topix traded in a similar pattern and closed +36pts (+1.9%) @ 1,885
Monday we get PPI and Machine Tool Orders.
S Korea
KDCA announced 747 new covid cases above 700 for a second day
Kospi opened higher at 3,131 and traded around 3,140 until midday before working higher with resistance first at 3,150 and then 3,160 which it tested several time in the last 40 minutesand closed +35pts (+1.1%) @ 3,158
Kosdaq opened higher and after some volatility in the first hour worked slowly better to clsoe at the day high +15pts (+1.6%) @ 967
Data pre market
Export Prices Apr +10.6% YoY vs +5.9% Mar revised
Import Prices Apr +15% YoY vs +9% Mar
Taiwan 
Taiex opened higher at 15,819 and quickly rallied to 16,076 in the first 20 minutes but then trend lower to 15,730 around 12.40pm before working better to close +157pts (+1%) @ 15,827
Govt reported 29 new covid cases, concerns over cases making investors cautious. TSMC rebounded as expected along with other tech names. Plastics +VE but China Steel -3.7%
China 
CSI 300 opened slightly higher and tested Thursdays closing level in early trades before working higher to test 5,100 ahead of lunch. PM opened lower and traded slowly higher currently +117pts (+2.3%) @ 5,110
Monday we get China House Prices, Retail Sales, Industrial Production, Unemployment and Fixed Asset Investment data.
HK 
Pre market opened @ 27,873 +154pts vs +130pts ADR’s T/O back to a normal HK$3.17b
Initial traded down to test Thursdays close but then worked better through the morning to test 28,000 going into lunch. PM opened lower and trading sideways around 27,975 level; currently +322pts (+1.2%) @ 28,042
Baba weak after results missed but off initial lows, Meituan also weak but Tencent higher. CSPC Pharma strong but JD Health weak. AIA +VE on strong new business numbers. Samsonite +VE as loss narrows.
AACTech earnings strong, Genscript Bio placement by shareholder at 5% discount.
Europe
Futures indicate  FTSE 100 +25 points higher at 6,988, DAX +69 points to 15,269 and CAC 40 +35 points to 6,323, according to IG data.  UK PM worried about new covid variant and indicated that nothing can be ruled out in potential efforts to curtail it.
Unicredit slight -VE as Blackrock votes against CEO’s renumberation package.
Atlantia reported after mkt Q1 net loss on Thursday and confirmed that it would make a decision on the sale of a majority stake in its motorway unit by June 11.
Earnings due from CureVac and British software firm Sage.
Data due 
EUROZONE Monetary Policy Meeting Account
FRANCE Unemployment Rate
US Futures
Opened in Asia: Dow flat, S&P +0.04% and NDX -0.06% but have rallied and now Dow +129pts S&P and NDX +VE
Data due Retail Sales, Industrial Production, Manufacturing Production, Capacity Utilisation, Business Inventories, Michigan Data (Sentiment, Inflation Expectations, Consumer Expectations 5 year Inflation Expectation and Current Conditions) Baker Hughes Rig Count.
Earnings: Honda, Rosneft

Reported that Colonial paid hackers US$5m in crypto ransome payment. For which they got a decrypting tool but it was so slow the company also used its own backups to restore the system.


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FRONT PAGE
Violence flares between Jews and Arabs on streets of Israel
• Worst outbreak in years • Religious tensions high • Troops poised on Gaza border

McDonald’s boosts pay to lure staff as US employers struggle to fill vacancies
Another clear sign of wage inflation as the company increases pay and encourages franchises to do so too. Other large employers of low paid workers like; Amazon, Walmart, Costco, Chipotle are following suit.
Some are blaming the increased Federal benefits but I doubt it is that simple. In the last NonFarm Payrolls numbers the low paid service sector saw arise in workers. Manufacturing, which pays better, lost jobs and the JOLT’s data shows that a lot of advertised positions remain unfilled after 3 months. That suggests a skills mismatch and possibly a location mismatch too.
It will be interesting to see whether other better paid sectors start paying more to attact staff.
It may also be a concern about the potential for catching the virus and so the CDCP saying that fully inoculated people need not wear a mask or maintain six feet of socially distancing might have an impact too.
On that I would just mention that studies in India are showing that even vaccinated people have been contracting the virus. So it would appear that maybe the likes of McDonalds and others are going to have to inprove wages and conditions to attact staff. All of which is inflationary and could mean as a lot of people are wondering that the Fed is well behind the curve in its approach.

INSIDE
US suspects pipeline hackers live in Russia
Biden discounts Moscow involvement and urges calm over fuel shortages but he also put pressure on Russia to take responsibilty for clamping down on such groups.
I suspect that is the last warning that Russia gets and that if it fails to take action that the US will use its precision tactical deterrent capabilities to target Darkside in Russia with its own cyber attack to show that such actions will not be tolerated.

Mixing Covid vaccine doses raises risk of side-effects, trial reveals
basically says that you should follow the manufacturers instructions …. who’d have thought!

Pentagon misses China report deadline
List of companies with military ties delayed as Biden weighs decision on whether to maintan the investor ban that Trump put in place.
Seems that the Xiaomi case has made putting companies on the list more difficult and so Biden needs to ensure that companies on the list satisfy legal requirments. He can’t just drop it as that would show him as being soft on China. Which is something he has not been to date in many ways he has been much tougher than most thought he would be. An interesting read which means that for American’s investing in Chinese companies will carry additional risk.

Banks warned off lending to Myanmar junta
Myanmar’s interim national unity government (NUg) has cautioned foreign banks against lending to General Min Aung Hlaing’s junta, saying it will not recognise the debt once it regains power.
Worth a read as the struggle continues. Whislt the national unity government seeks to gain recognition it is difficult to see how they will be able to remove the Junta from power unless they get strong international co-operation and that would need a change of stance from China and Russia which is unlikely.
Whilst the junta is under pressure no doubt its control of the country remains tight.
Keeping it in the press and public domanine is the best chance the NUG has. Worth a read.

Companies & Markets

Chinese corporate dollar bonds hit as Beijing tightens credit
Investors unnerved by missed payments and approaching $100bn wave of maturities.
An interesting read; highlights the both the potential pitfalls of business in China and influencial parties as well as the dilemna that China has in trying to keep off shore investors happy because it needs more financing whilst at the same time trying not to fully underwrite loan defaults.
Looks at the case of China Fortune Land, who missed a payment in Feb but didnt rush to tell investors. Off shore guys get to hear even later and have to wait for the onshore guys to be resolved first; that usually goes through the courts and can take years. In China Fortune Land’s case it is complicated by the fact that Ping An involved as ‘both an investor and a member of the property group’s creditor committee.
Other committee members include China’s national banking and insurance regulator and the cash-strapped government of Hebei province, whose failure to pay China Fortune for work on infrastructure projects helped bring about its default.
Offshore bondholders that collectively hold more than $1.5bn in China Fortune debt have formed their own committee.’
This is just one case, others mentioned are the Peking University Founder Group, Huarong Asset Management and there are a whole lot more similar cases.
In the past off-shore investors presumed that the Government would back the SOE’s but that is no longer the case but they have to mindful of China’s need for finance going forward so just burning the off-shore investors is not really an option.
It looks as if the bond market is slowly realising what the equity market learnt back in 1999 when Gitic declared itself backrupt with 44.4bn of debt mainly to foreign lenders. Gitic at the time was assumed to be to big and well connected to be allowed to fail…
In that case it was the individual Chinese creditors and small investors that got paid back first, in accordance with Chinese law.
It took years for China to regain investors trust both on-shore and off-shore. Recently many investors memories have been clouded in the hunt for returns this might bring back clarity.
Beijing will be well aware of the potential for damage at the moment, especially with its need for foreign capital and so try to engineer a solution but in the meantime both on-shore and off-shore investors should be worried.

Alibaba swings to first loss since going public as Beijing’s crackdown takes toll.
Looks at the results. Good revenues helped by the acquisition of Sunart Retail but earnings hit by the recent fine and the outlook less optimistic than before; albeit with a little more certainty.
An interesting read; lots of competition and more regulation whether that makes for a better playing field it is difficult to say. ‘“We can see so many of our competitors are running huge losses and investing huge amounts . . . there is no reason for us not to be investing,” said chief financial officer Maggie Wu.’
I’m not sure I follow that logic; investing despite huge losses one would hope that they are investing in areas where there is over a 50% chance of being successful.
Ants financials in Q4 hit records but that would have been before the business was forced to restructure I doubt the Q1 numbers will be any where near as good.
Shares are currently -4% in HK off the earlier lows.

Samsung shrugs off chip supply challenge from China and US
Complexity and scale involved in cutting-edge production are a tall order for would-be rivals
Well worth a read, whilst China, Europe and the US talk about boosting investment in the sector and building their own chip sectors; the implimentation is far more difficult.
In part because of exsiting dominance; gives and keeps Samsung (and I would says TSMC too) at the cutting edge of advances as their clients seek better variants. The huge costs involved can only really be bourne by those who are already making money and have the scalability.
'Samsung has pointed to its leadership in intellectual property and engineering experience as evidence that it could defend its position.'
The costs are probitative too IC insight said ‘Samsung had spent $93.2bn on its semiconductor business in the past three years, double that of China’s semiconductor suppliers combined.’
That sort of spending is probably beyond Government budgets too and would only get you to the starting line in my view and lacking experience.
But the article notes ‘Chinese challengers are slowly making gains.
Dan Wang, a Shanghai-based tech analyst at Gavekal Dragonomics, pointed to Yangtze Memory Technologies and Changxin Memory Technologies, which have cornered about 3 per cent of their respective Nand and Dram markets.’ Which they have managed to do by hiring large numbers of Koean engineers. Which raises the question of whether, with Samsung expanding, they will be abler to continue to do at a competive rate.
'Bain’s Sinha said China’s chip sector was slowly showing signs of weaning itself off “western origin” technologies. But he cautioned that he did not expect incumbents to change in the next three to five years. “There are alternatives that are emerging that will allow the ecosystem in China to continue to develop richly,” he said.'
In three to five years the landscape will no doubt look very different and as Morris Chang of TSMC said they are not standing still waiting for the competition to catch up. Samsung and TSMC are committing more capex to ensure their dominance, which in my view is why they are good long term investments. Yesterday they were both under pressure today their shares have rebounded; Samsung back to the 80,000 won level and TSMC +1.8%.
See also LEX Capex: big spenders Notes how TSMC, Samsung and Amazon are huge capex spenders; driven by demand.  But take them out and the the mood is a lot more cautious.  It concludes
'Take tech companies out of the equation, however, and a mood of caution still prevails. Balancing an uncertain outlook with dividend-hungry shareholders has sent capex lower down the agenda in some C-suites. Regulations have also served to temper budgets. Climate change means oil and gas majors are no longer spending large sums exploring oilfields.
Even next year, the US energy sector is projected to spend in aggregate just 70 per cent of pre-Covid-19 levels, S&P Global data show. Not every sector can yet afford to invest for growth.'
I would say that demand through the pandemic has been focused and tech was the beneficary but even pre pandemic companies outside tech were not big on capex which suggests there was either caution or an equilibrium, with re-opening occuring it is difficult to see why that, for goods will change. For services short term yes a rebound but that has limited upside.

Musk rules out bitcoin payments for Tesla cars
Worth a read -VE for Bitcoin that uses ‘proof of work’ mining mechanism but +VE for other crypto’s that use less energy; like Ether which uses the ‘proof of stake’ method.
Investors were surprised at the results to find it had already sold some of its investment. Musk said they wouldn’t sell any bitcoin although he didn’s say how much they still held or for hold long that statement would hold. So maybe he’s already out?
It will be interesting to see how many other companies that followed Tesla also announce a change of policy?

See also OPINION
Musk wakes up to bitcoin’s fossil fuel issues
by Gillian Tett which is worth a read and relevant to Musk and the article below on climate change.

Beware risks of the spin behind climate change By  Cyrus Taraporevala  chief executive of State Street Global Advisors
Worth a read notes there are is a lot at stake and some great new jargon ‘“greenwashing” — companies embracing sustainable practices for public relations purposes — a far greater danger is “brown-spinning”: selling off the highest-emitting components of businesses to private equity and hedge fund actors at a discount. This can reduce disclosure, shield polluters and marginalise the voice of the investor.’
He concludes ‘While much is uncertain, what is not in doubt is that with investors at the table, there will be fewer opportunities to profit off pollution. Public disclosure will increase, not evaporate. And with a focus on the how, there will be far greater accountability to deliver the climate progress we all want to see.’

Artistic licence Sotheby’s $300m bond deal puts Drahi in the frame for bumper windfall.
Looks at the boom 'in so-called dividend recaps from private equity groups and other owners, who borrow to fund bumper payouts from companies they have acquired. '
Made possible by the low interest rate environment but the question that many must be asking is what happens when interest rates start to rise. Many of these companies are seeing a good upturn in thier businesses but as interest rates rise their business could suffer. An interesting read.

Era of vulnerability dawns for newer-generation tech stocks By
Richard Waters.
Looks at the real impact of sell off in established tech stocks this week and notes that relative to there performance over the longer term it is barely a blip. ‘In the first three days of this week, the combined market value of Apple, Microsoft, Amazon, Alphabet and Face-book fell around $450bn. But the retreat represented less than 6 per cent of their total worth.’
But for new entrants the change in senitment is likely to have greater impact. Their future earnings will be much more impacted by higher interest rates. It may also impact the bonus packages they pay (it focuses on this weeks Palantir results).
Some of the correction was long overdue and there is still room for more; especially for stocks like Tesla. But it does not mean the tech rally is finished. Some tech companies remain well positioned for success ‘Strong secular growth trends that have underpinned them — the shift to digital advertising, the rise of ecommerce, the remaking of IT through cloud computing — have room to run.’
So the next phase is likely to be even more lopsided than before;
'The big platforms promise reliable, double-digit earnings growth, at a time when investors are being forced to become far more selective.'
It concludes by saying that after the initial knee jerk selling the market then revisited the stocks the next day and bought them up.
Worth a read the outlook for many of the big tech names remains good because of structural changes that have taken place but equally there seem to be more regulatory changes to come that could upset the landscape; coupled over time with higher interest rates and so one would image more alternatives.

Editorial
Low inflation cannot be taken for granted

Recessions often change macroeconomic relationships
Post 2008 there were constant warnings about impending inflation and a return to the ‘normal’; all of which failed to appear. But there have been times when the situation has changed dramatically but few have been predictable. So fear of the unknown should be expected and was seen in this weeks reaction to inflation prospects and investors looking to hedge themselves.
But the pandemic induced recession presents more unknows as it ends not least because of the monetary and fiscal stimulus that has been applied.
Critical is the labour market; especially in the US as Biden seeks to shift more power to workers; which could impact inflation expectations and raise them significantly.
It concludes
'The experience of the recovery from the 2008 financial crisis taught central banks that low inflation was consistent with a much lower level of unemployment than they thought. Also instructive was the realisation that they have limited ability to predict changes in the relationship between unemployment and inflation. As the world recovers from the coronavirus pandemic they should remember both lessons.'
Worth a read.
Also listening to the ERI-C webinar ‘The Implications of Global Demographics For Long-Term Investors: Charles Goodhart & Manoj Pradhan in conversation with Stewart Paterson' last night it is also worth remembering the impact of people working for longer and the cost impact of an aging population which has often been ignored in the past.

For interest
OPINION  Only scientists and voters can change the politics of catastrophe 
By John Thornhill
Great quote to get your attention ‘Eliezer Yudkowsky, co-founder of the Machine Intelligence Research Institute, reckons that an alarmingly different kind of Moore’s Law is at work today: the minimum IQ needed to destroy the world drops by one point every 18 months.’
Now there’s a worry.
References this weeks’ WHO report on the international  reaction to covid and Niall Ferguson’s latest book Doom: The Politics of Catastrophe,
It concludes ‘Distracted politicians are always likely to delay and defer to “realist” arguments unless “idealist” scientific experts empowered by civil society can convince them otherwise.’

OPINION
Relax: trust fund kids are not taking over the world  By Chris Giles
Looks at the ‘meticulous study of past, present and likely future bequests and incomes, the UK’s Institute for Fiscal Studies paints a relatively optimistic picture — although readers need to venture beyond the document’s summary to get this rounded, if thoroughly unfashionable, view.’
A good read.

FT BIG READ. INDIA
Covid crisis diminishes Modi’s stature
Many Indians feel abandoned by their leader, who ignored signs of a second wave and has appeared at times indifferent to their plight. If the disillusionment continues, it could sap his political authority.
Worth a read because it could prompt a major change in India politics but the lack of a unified alternative and the fact that elections are not until 2024 might save Modi.

Airbnb ‘Smart Pricing’ widened racial disparities

Low uptake of algorithm by black hosts increased earnings gap, says study.
Worth a read. I hadn’t even thought about racial implications for Airbnb. Also interestingly there is now a Noirbnb aimed at African-Americans.

US unions fear jobs blow from transition to electric cars
With fewer parts needed and a shifting supply chain, UAW sees growing risks.
An interesting read and I guess like many institutions the unions are going to have to demonstrate the benefits they can bring to the workers. Shows Telsa’s Musk in a bad light for his illegal attitude to the unions.

Funds bounce back from ‘arbageddon’ to capitalise on surge in dealmaking
Hedge funds that bet on corporate deals have rebounded from big losses during last spring’s coronavirus-driven market turmoil and are aiming to profit from a surge in M&A as economies reopen.
'These types of funds typically buy shares in the target of an M&A deal and bet against the acquirer, making money as the deal closes.'
Mentions the new Trium Capital Fund expected to raise $200m .
Nice quote “We feel we’re at the beginning of a really fertile period for merger [arbitrage],” said Donald Pepper, co-head of Trium and a former Goldman Sachs banker. “Animal spirits are coming back to corporate boardrooms, deal sizes are increasing and there’s not as much money chasing merger arbitrage.”
Also mentioned ‘Jamie Sherman’s Kite Lake Event Driven fund, which is up 7.5 per cent, Paul Glazer’s $1.4bn Glazer Enhanced, up 8.6 per cent, Michel Massoud’s Melqart, which has gained 14.8 per cent, and $840m-in-assets Berry Street Capital, which has made 6 per cent.’

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