May 17 FT Thoughts China Bond D/grades, Population issues and Taiwan covid worries

17 May

This and previous notes can be found at on Substack

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Markets at 1:15pm Hong Kong time.
Bitcoin continues to see weakness along with other crypto’s after comments from Musk. China data was weak but Team China looks to be supporting the domestic markets.

Market trended higher to test 7,060 and a high of 7,065 mid morning but then trended down to the 7,035 level and then traded sideways.  Currently +23pts (+0.3%) @ 7,037.
Crown officially rejected the improved $8.3b takeover offer from Blackstone but says it is still considering a bid from The Star.
Ampol and Viva Energy reached a deal with the federal government +VE for refining remaining in Australia. Miners +VE as Gold price rises.

Nikkei opened higher at 28,310but sold down as PPI came out stronger than expected and covid concerns ovrehang the market, hit a low of 27,633 after lunch and currently edging higher; -311pts (-1.1%) @ 27,772    
Leaders: Ebara, Yamaha Motor, Credit Saison, Dentsu and Tokyu Fudosan.
Laggards Fujikura, Mitsubishi Materials, Comsys, Nissan Chemical and Konica Minolta.
Topix traded in a similar pattern opened at 1,897, hit support at 1,870 and currently -8pts (-0.4%) @ 1,876

PPI Apr +0.7% MoM vs +1% March revised from +0.8% (F/cast is +0.6%)
PPI Apr +3.6% YoY vs +1.2% March revised from 1% (F/cast was +3.3%)
Due later
Machine Tool Orders Apr  March was +65% YoY F/cast is +50%)

S Korea 
KDCA reported 619 new civid cases; above 600 for a third day.
Kospi opened higher and tested 3,173 in early trades but then reversed, saw support at 3,140 for about an hour and then tested Friday’s closing level but failed and then sold down to 3,120 level around 1pm before bouncing. Currently -18pts (-0.6%) @ 3,136
Kosdaq opened higher and tested to 973 initially but then reversed and traded around Friday’s closing level until late morning when it saw increased selling down to 959 level around 1 pm but now working better; -5pts (-0.5%) @ 962

Taiex opened lower (15,555) in response in an increase in the number of new covid cases over the weekend and the clsoing of schools. The lower open prompting more margin calls and index dropped initially to 15,333 but then worked better to 15,720 but failed to get higher and trended lower to find supoport at 15,200 before working better to close -460pts (-2.9%) @ 15,365

CSI 300 opened slightly higher and rallied to 5,200 despite the poor China data and new covid cases in China. Traded around the 5,200 in lunch. PM starting to dip lower; currently +78pts (+1.5%) @ 5,189

Team China in support of the market.
China House Prices Apr 4.8% YoY vs +4.6% March (F/cast was 4.8%)
Retail Sales Apr 17.7% YoY vs +34.2% March (F/cast was +26%)
Industrial Production Apr +9.8% YoY vs +14.1% March (F/cast was +10%)
Unemployment Apr 5.1% vs 5.3% March (F/cast was 5.3%)
Fixed Asset Investment (YTD) Apr +19.9% YoY vs 25.6% March (F/cast is 19.5%)

Pre market opened @ 28,131 +103pts vs +223pts ADR’s With slighty evevated T/O I think as a lot of last weeks shorts, which were put on when the market was trading below 28k covered. Market tested to 28,268 but failed to break higher and consoldiated back to 28,100 before a bounced to 28,165 and then traded around there into lunch.
PM working higher in early trades currenly +177pts (+0.6%) @ 28,200

Futures indicate a mixed open FTSE +4 points higher at 7,048, Germany’s DAX -2 points at 15,410 and France’s CAC 40 +20 points at 6,396, according to IG. No data due but weak data out of China, showing the patchy nature of its recovery. Also comments from PM Johnson about the spread of the Indian covid variant
Earnings due from Ryanair

US Futures
Opened slightly higher but have slipped Dow now -76pts (from +40 pts). S&P 500 futures and Nasdaq 100 futures were both -VE (were +0.2%).
Data due NY Empire State Manufacturing Index, NAHB Housing Market Index, Foreign Bond Investments, Overall Net Capital Flows, Net Long-term Tic Flows.

Earnings : Hostess Brands, Lordstown Motors, Tencent

Foxconn the carmaker? Disruption in the era of electric vehicles
Looks at how the Foxconn and other previous Iphone assemblers are now looking for the next venture and it is electric cars.
Interestingly the move to EV’s will actually reduce the barriers of entry to the the auto sector.
A good read

AT&T closes in on content streaming deal with Discovery
• Plan would create $150bn unit
• Latest test of Netflix’s dominance

If the deal goes through it will also have implications for Disney and a host of smaller entrants in the market.

Bond downgrades by Chinese agencies soar as Beijing seeks to slash credit risk

Also reported in Caixin who said they were updating methodologies.
It reports that 366 bond ratings were downgraded in the first four months of 2021 vs 109 in the same period in 2020.
Follows ‘a warning in November by Liu He, China’s vice-premier, that Beijing would have “zero tolerance” for corporate malfeasance in the aftermath of a series of defaults by state-owned companies.’

Mentions HNA, Tsinghua Unigroup and Yongcheng Coal and Electricity.

It marks a change but there is still a lack of clarity in a lot of cases. More importantly it is likely to worry on-shore investors who are not used to downgrades or changes.

Resisting pressure Netanyahu says Israel to take on Hamas ‘with full force’

Looks at the flare up between Israel and Hama. China has called on the UN to call a ceasefire although it has resisted such calls for Myanmar putting its credentials in question.


Inflation and jobs data shake US confidence
White House holds firm as critics step up attacks on Biden’s recovery agenda.

The key here seems to be the willingness to believe that one months data can explain the whole situation. The rhetoric seems at this stage is mainly political. Markets had a knee jerk reaction mid week but had a bounced back on Friday despite the weak Michign sentiment data.

Key is that at this stage the Fed remains committed to its stance and the bond market appears realtively relaxed. The question is whether that is because it does not see the data as a problem or because it doesn’t know how to react to the data?

China’s demographic challenge looms large
Country’s fertility rate is lower than the US’s and Japan’s, prompting calls for action.

Another look at the recent census data. Makes the point that many women when asked to choose between having kids or a career are chosing a career.

It quotes ‘Ning Jizhe, director of the country’s National Bureau of Statistics, fended off calls from experts, the public and China’s central bank that family planning limits should be lifted entirely, saying existing policies were sufficient. “As long as we have supportive policies in place, China’s birth potential can be realised,” he said.’

But I think that party thinking is out of touch with reality of everyday suburban living.

Additionally there is concern about the accuracy of the published data because in China ‘Many ministries and regions seek bigger population figures to justify higher budgets, but the People’s Bank of China has warned that a reckoning is coming.’

It raises again the issue of hukou and the benefits that bestows in terms of school places for children.

There is also the concern about those over 65 whose numbers are growing and thier increased need for assistance at a time when the working population falls.

It does note ‘Between 2010 and 2020, China’s working age population fell more than 3 per cent to 968m, but higher education rates, technological advances and adjustments of the retirement age will help boost productivity.’

But for how long that can continue is debatable.

On the data accuracy it also mentions ‘The 2020 census reported that China had 255m people aged 14 or below at the end of last year. But annual birth figures for 2006-20 added up to 239m — a discrepancy of 16m.’

Also the lack of an offical death toll, which could have given insight into the impact of covid which China has stressed was brought quickly under control.

Whatever the data does or does not say the reality is that the population is going to decline if birth rates don’t improve and that is likely to require more radical overhaul than is currently being proposed.

I would again recommend the Free ERI-C webinar on 'The Implications of Global Demographics For Long-Term Investors: Charles Goodhart & Manoj Pradhan in conversation with Stewart Paterson' Which deals with aging population and how some of lesson from Japan were missed.

Taiwan reports first significant virus outbreak

Taiwan, which has been among the most successful globally at containing Covid-19, has introduced two weeks of strict social-distancing measures after reporting more than 200 new cases in its first significant community outbreak of the virus.

The Taiex sold down on the news but has since stablised.

Key now will be controlling the spread especially as Taiwan has a slow vaccination rate due to its previous control over the spread. Key I think is that the government has moved quick to introduced stringent social distancing measures and close contact tracing.
This morning the market opened lower despite the rebound in the US on Friday but is working higher.

UK holds back on plan for global business levy

Key being that the UK wants the US to also deal with the issue of taxing digital companies too.

Quoting Mike Williams, ‘the Treasury’s director of business and international tax, said a deal that looked only at a global minimum tax was not politically acceptable. “The core UK proposition is that we’ve got to solve the digital tax issue, which we’ve been working on for years,” he said.’

It will be interesting to see how far Biden is prepared to compromise with regard to where US firms pay their taxes.

Enthusiasm for Spacs shows signs of waning
Key seems to be the lack of retail participation.  Whilst not giving reasons it meantioned that retail investors appearing to be focusing more on crypto at present.  Although that might be short lived too as Musk’s recent Tweet implies Tesla could be out of Bitcoin; something I suggested last week when he said the company wouldn’t be selling anymore bitcoin.  I also think it could have to do with a general decline in retail day trading as people return to the office and are less  able to monitor their holdings.  There is also the concern about the regulator probing Spac’s.  None of which will help sentiment towards  Spac’s; even those with deals.

Worth a read.

Credit Suisse clients press for Greensill compensation
• Dilemma for new chief Horta-Osório
• Threat of lawsuits from investors

An interesting read as ever the bank’s lawyers are confident they have not breached the rules but being legally right and keeping clients are generally two different things and there is the brand image too, which may be the most important consideration.

Hot topic Carbon takes star role on earnings calls as investors turn a deeper shade of green.

Looks at how much use the word ‘carbon’ is getting in earnings calls according to reserach from UBS.

They also found ‘that investing in a portfolio of companies across sectors and regions with lower emissions intensity — the amount of CO2 emitted per dollar of revenue — led to improved returns over the past decade against the broader market. The low carbon intensity strategy generated returns of 11.6 per cent a year over the period, exceeding the MSCI World index of global developed market equities by 1 percentage point.’

Drawing a link between good environmental awareness and higher returns and profit. UBS also notes though that there is currently a rush of cash to such companies that is pushing up valuations and that could itself lead to outperformance especially with the COP26 climate summit in Glasgow later this year. But warned “the outperformance of low carbon may come to an end when interest in sustainability stabilises. But we do not expect that to happen in the near future.”

It is an issue for any sector that suddenly finds itself in the spotlight for either good or bad reasons. Investors need to be selective and especially if investing via ETF’s where there can be issues of liquidity and diversity. As always due diligence pays off.

Ties that bind White Oak to Gupta’s metals empire

Apparent white knight had compelling reasons for riding to the rescue of GFG Alliance.

Worth reading because having said it was withdrawing on the news of the Serious Fraud Office probe; which would put the GFC alliance in a very difficult and maybe precarious position; it has now said it may proceed.

The article says that could be because it already as an exposure to the alliance and is trying to manage its downside.

An interesting read because the article suggests the ‘hard nosed attitude of the lender’.

It will be interesting to see developments especially for the impact on the global steel sector; which whilst currently seeing some good times is still facing huge pressures.

Pandemic has changed the way Japan shops

The crisis has left the country’s retailers under pressure to improve their offering online — and in their stores

An interesting read about how Japan is slowly being forced to accept on-line retailing and how most firms have been equally slow at promoting it. Part has been the older members of society not adopting digital technology and prefering ‘the old ways’.

'The web will account for almost 11 per cent of Japan’s retail sales by the end of the year, according to research by eMarketer. By contrast, the consultancy forecasts that online sales will account for 52 per cent of the total in China by the end of the year, 15 per cent in the US and 13 per cent in western Europe.' Part of that difference being that many in Japan had ‘bricks and morter’ establishment on their doorsteps whereas in China they did not. Digital brought them.

It mentions about Hiroshi Mikitani’s Rakuten has tied up with Japan Post which makes a huge amount of sense for both. Japan Posts share price peaked in March on news of the deal at Yen 1,100 and now trades around Yen 900 but has potential and Rakuten was similar. Closer co-operation between the two I think would reap benefits for both as the article says ‘Rakuten will dramatically expand its delivery network and put its brand in front of older shoppers who use post offices. Japan Post, meanwhile, can tap the online retailer’s savvy in payments and use of customer data.’

It looks at how Aeon has adapted which notes how covid has forced a change to digital which is changing the fabric of peoples lives.

Also Isetan Mitsukoshi which really only started adapting a year ago but now has an app that makes all its products accessible and a facility to talk to staff virtually. It notes that the store is still trying to work out where to position itself in the market.

The message as with much in Japan is that mangement is living in a bygone era and assumes the rest of society is too, missing completly the presence and spending power of the younger population.

As seen in the rise of as fashion site Zozo and flea market app Mercari.

Some like supermarket chain Ito-Yokado are still finding their way, having only recently embraced phone ordering.

It also looks at Fast Retailing, that is a Japanese success story with its Uniglo chain.

The message is clear though that customers want a better service the fortunately for the existing stores, nobody is currently ticking all the boxes.

Axa’s Asian operations hit by cyber attack

French insurer’s units in Thailand, Malaysia, HK and Philippines affected.

Seems to have happened ‘recently’ but only coming to light when the criminals announced their success in stealing three terabytes of data was posted on the dark web. The fact that they are announcing the theft of data presumably means they were unable to extract a ransom and are now looking to sell the data and embarass Axa or possibly as a prelude to another attack if a ransom is not paid.

The data is said to include ‘customers’ personally identifiable information, medical records and claims, as well as data from hospitals and doctors. It also included screen-shots of IDs and passport pages, bank documents, hospital bills and medical records of patients’ personal health conditions that the hackers appeared to be sharing as proof that they had compromised the company.’

Axa said the data was processed in Thailand by Inter Partners Asia and that there was no sign of further losses.

Interestingly Axa has recently also announced that it will be suspending the writing of cyber insurance policies that refund the cost of ransom payments made to cyber cartels.

It raises the question about the outsourcing of important data and I would imagine the appropiate agencies are trying to work out how the ransomware; called Avaddon, worked and where the hackers were based.

Market Questions. Monetary policy

High US inflation figure puts pressure on Fed but will it act?  

I doubt it, everything they have been saying suggests that they are not going to change policy on one months data and that they still the inflation data as being transitory and expected, so no need for change. FOMC minutes out this week likely to confirm that.

Can the euro continue its rally against the dollar?    Really comes down to in my view whether it is a matter of the Euro rallying or the USD weakening and the reality is that it is a combination of the two.

Better forecasts for the Eurozone will help but it is also imapcted by data from the situation in the US.

How hard has Japan’s economy been hit in the first quarter?  comes ahead of tomorrow’s GDP data.  The question is really about whether the pandemic has changed attitudes in Japan; Masamichi Adachi, chief economist at UBS in Tokyo, does not think it has which has says is why new covid cases have been so slow to decline.  I think he could be right.

Renault and Nissan upbeat over battery race

They are looking at using a joint battery system which to me makes a lot of sense. In the ideal green world all cars would use the same battery system be it recharging or swap but for all their green credentials that is unlikely to happen. As time goes on it is likely that the battery sector could become a key deteminent in the auto sector.

The developers still betting on the London office market

Even though the number of people working in offices is expected to be permanently lower, there have been bidding wars for vacant sites. Investors believe there will be strong demand for modern buildings.

An interesting read focused on London but the same criteria will be applicable world wide; and Asian cities will be not different except for the fact that in some Asian cities more of the value is in the land and they have more cash so the decision to redvelop can be made quicker.


China’s ambitions create a new frontier in space

The rules and norms of extraterrestrial behaviour need to be updated. Puts forward the case for constructing intrnationally agreed rules for conduct in space.

Worth a read.


Geopolitics spells the demise of the global chief executive  By Elisabeth Braw a fellow at the American Enterprise Institute, a think-tank.

Looks at how globalisation has, it says, ‘allowed businesses to scour the world for talent. Though it would have been a rarity half a century ago, today a foreign-born chief executive is unremarkable.’

That is certainly true for many western businesses but it remarkably untrue for some countries in Asia.

Nevertheless an interesting read, concludes

‘The fact that some countries aren’t getting along doesn’t mean businesses should discriminate against certain nationalities. But it does mean they should get used to a reality in which they can be attacked as country proxies. Business leaders may wish to revise the Davos world vision of vanishing borders and nationalities.’

Why radical reform of urban planning is essential  By Martin Wolf

Looks at the UK planning system and suggests change that could be made. Worth a read.

Bullying Russia yearns to be treated as a great power  By Lilia Shevtsova the author of ‘Putin’s Russia’ and a member of the Liberal Mission Foundation

Worth a read

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