Apr 26 FT Thoughts Beijing alert to precarious debts, Chip shortages widen, Alternatives to BRI, Banks cut flights and more

26 Apr

MARKETs @ 1pm Hong Kong time
After a hesitant start Asian markets expect Australia (flat) are working higher.
BoJ on Tuesday and FOMC starts with an announcement Wednesday.
Big week for earnings too.
India seeing a strong rebound in early trading.
Chloe Zhao won the best director award at the 93rd annual Academy Awards unlikely to be acknowledged in China
Netflix wins
ASX 200 opened has oscillated all day around 7,060 level, and traded 7,070/050 currently -2pts (flat) @ 7,058
Nikkei opened +75pts @ 29,095 but sold down to 28,920 in the first 10 minutes and bounced before testing the 28,900 support a few times, which held and then worked higher to 29,145 before easing into lunch.  PM opened higher ,tested 29,100 and then worked higher  to 29,241  before easing back Currently +167pts (+0.6%) @ 29,188.
As I wrote this morning the new emergency states have largely been priced in.
Topix traded in a similar pattern, tested down further to 1,907 and didn’t rise so much but currently +4pts (+0.2%)@ 1,919
No data today but BoJ and Quaterly report tomorrow.
Kospi opened higher and worked higher with resistance around the 3,210 level which it tested several times and has now eased back from; currently +20pts (+0.6%) @ 1,206
Kosdaq dipped into the red in early trading but then trended higher, resistance at 1,030. Currently +2.5pts (+0.2%)@ 1,029
No data today but GDP Growth Rate tomorrow
Open higher after good Industrial Production and Retail Sales data Friday along with the US bounce. Worked higher all day currently +246pts (+1.4%) @ 17,546
CSI300 opened higher but initially sold down to 5,130 (vs Friday’s close 5,135) but then rallied 5,180 which was resistance, tested a couple of times , consolidated rallied but then sold down into lunch +14pts (+0.3%) @ 5,149
Pre mareket opened @ 29,107 +28pts vs +90pts ADR’s
Sold down to test 29,000 in early trades before rebounding to 29,238, then trended lower, with choppy trading; testing Friday close (29,078) before a small bounce into lunch @ +23pts (+0.1%) @ 29,102
Chinese Financial weak (they report later this week) Ecommerce names firm but Tencent the laggard, I think it will be force to hand over client financial data like Ant has been. Chinese consumer names weak especially the brewers. Shipping names continue to see interest.
Expect markets to open higher following the US rebound Friday and the positive lead from Asia
Data due GERMAN Ifo Business Climate, Current Conditions, Expectations.
US Futures 
Opened in Asian time Opened flat Dow +3pts, S&P and NDX slightly -VE but less than 0.1%
Data due Durable Goods Orders, Dallas Fed Manufacturing Index
Earnings Tesla, Canadian National Railway, Canon, Check Point Software, Otis Worldwide, Vale, Ameriprise, NXP Semiconductor, Albertsons, Royal Phillips

Front Page
India at Covid breaking point'The country reported a record 349,000 new infections on Saturday, along with more than 2,700 deaths, as India’s second wave breaks global milestones.’  UK, US and Europe all now sending emergency supplies including oxygen and ventilators.A reminder that covid is far from over.
Page 2 India flies in emergency medical supplies
Western allies stirred into action by record number of new Covid infections
For investors it would appear good news for the makers of oxygen generators and ventilators but whether India is going to dramatically increase its spending on healthcare going forward remains to be seen.

Credit Suisse shareholders seek risk chief ’s scalp after scandals
• Big investors try to unseat Gottschling • Swiss bank reels from Archegos and GreensillIt will be interesting to see how many shareholders feel strongly enough to take action.

European banks’ plan to slash business travel bodes ill for airline recovery hopes
Cuts of as much as 50% from pre-pandemic levels are being proposed; as many of the new ways of remote working trialed during lockdown become the norm. It also notes that ABN will switch to trains rather than fly, which makes sense for some journeys but not all.
Banks making blanket decisions is rarely a good idea, whilst Zoom calls can replace some face to face contact there will still be occasions when it makes sense to travel to meet both clients and teams. More sensible would be to look at whether bankers need to fly business class or first class; that would probably be a more prudent exercise.
For airlines the outlook remains tough but it is not only bankers that fly for business, most other sectors has necessary flights for things that cannot be done over Zoom or Skype; like engineers on projects etc.
Key for the airlines is how they price their seats to make them attractive to travellers. As the article concludes 'Several senior bankers said they were keen to resume some types of travel such as visiting staff and clients, but that 2020 had proved that many trips taken in the past were superfluous.’
The real test will be whether productive trips are cancelled so the senior managers can still have their jollies and maintain the 50% cut. As I started rather than making a blanket decision a proper business case for each flight should be considered; and the merits of each flight weighed up.
It does highlight a problem with big banks, top management seeks to reduce costs and makes broad cuts which impact the income generators at the customer level. Better to have proper guidelines so as not to handicap those that really do need to fly.

‘Delinquent’ Italy turns into model European
Draghi rebuilds relations with Paris and Berlin while helping set bloc’s economic agenda.Worth a read because Italy has been a burden to the EU in many ways and Draghi’s presence is changing that which could be a factor is a swifter recovery in Europe which will be good for Asian exporters.

Beijing alert to precarious debt conditions
Authorities target property sector with ‘three red lines’ policy to limit leverage
Looks at the increased tightening by the PBoC in recent months as is seeks to control the credit cycle in China. They had already targeted the property sector at the beginning of the year with the “three red lines” policy. That has had an impact on the construction sector and taken some of the steam out, which will have a knock on effect to steel production, infrastructure and the purchase of household appliances in due course.
The article says Beijing is worried about the debt burden, which is likely but also they are worried about public opinion if the property market bubble should burst. It quotes Evans-Pritchard (China economist at Capital Economics) “They seem more concerned about the debt sustainability impact of Covid than a lot of other countries, which is why they’re moving so quickly to normalise policy,”
But because the recovery in China is patchy they are trying to find sector specific measures rather than just targeting interest rates.“It appears that the economy has slowed,” said Dariusz Kowalczyk, an economist at Crédit Agricole. “I think that’s why money market rates have been guided lower by the PBoC, to ensure the economy is doing OK.”
It concludes 'While attention has focused on the US, where Joe Biden’s stimulus has lifted global growth forecasts, some investors point to the shift in China’s lending patterns as an under-regarded indicator for the trajectory of the recovery.“
The US fiscal spend completely dominates the inflation debate,” said Bhanu Baweja, chief strategist at UBS investment bank. “I’m surprised by the extent to which people are not talking about the Chinese credit impulse.”’
I think, as the article notes, that the recovery in China is very patchy. A lot of businesses have done well by retooling and producing covid related personal protection equipment but the demand for that will reduce over time and then question is then has their original business demand picked up or not. The other driver has been the demand for electronics those two have been the drivers. Outside of those the economy is suffering, textiles I would imagine especially.
Electronics could falter on the chip shortages in due course (See Chip drought starts to pinch below)
The other big issue will be local government financing. With a squeeze on developers land sales are likely to suffer and cause shortages to local budgets, as seen in the fact that local governments have not been able to support SOE businesses that are in financial trouble. That has lead to defaults which puts more pressure on the system. The current concerns over China Huarong illustrate that.

Indonesia finds sunken submarine broken apart off Bali coast
Indonesia has found its missing submarine split into three parts in deep waters near Bali, declaring all 53 crew dead after a five-day search.
A tragic loss but the article highlights the issues of patroling the South China Sea waters in an effort to prevent China usurping other nations rights.

Russia signals June date for Putin-Biden summit and Kremlin intensifies campaign to silence Navalny supporters
A reminder of the tensions in Europe

US offshore windpower project tests strength of Biden green jobs promise
First commercial-scale turbine scheme highlights challenges and opportunities facing states.Looks at the details of job creation and the position of the unions.

Yang charms business in New York mayoral push
Former entrepreneur makes inroads as polls show his campaign is gaining traction

Turkey hits at White House for Armenian genocide recognition
Turkey has rejected Joe Biden’s recognition of the first world war-era massacres of Armenians as genocide, warning him the statement has “opened a wound” in relations between the two Nato allies.

Price of US summer rentals in the great outdoors surges
Having been cooped up at home and with overseas travel restricted Americans are looking at the great outdoors.Concludes 'Analysts say the increase in the price of short-term accommodation rentals is the first sign of a jump in travel inflation with Americans, who have been reluctant to go on holiday, preparing to take their first vacation in over a year. The increase in demand comes at a time of constrained supply, because second homeowners who previously rented out their properties to holidaymakers are now occupying them after fleeing urban areas at the start of the pandemic.’

Lebanese bank governor faces fraud probe
Riad Salame and brother deny allegation of $300m offshore embezzlement

Costa Rica prepares for reckoning on borrowing after Covid forces delivery of reforms
Costa Rica is a standout in Central America: decades of democracy and political calm have paid dividends with high prosperity, an enviable welfare state and generous public sector wages.
But Covid-19 has brought a reckoning. As the economy contracted 4.5 per cent last year and the tourism sector 40 per cent, a debt burden close to 70 per cent of gross domestic product proved unsustainable, forcing President Carlos Alvarado to deliver long overdue reforms and go cap in hand to the IMF for a $1.8bn loan. That is not going down well with the locals.

Chip drought starts to pinch appliance and phone groups
• China stockpiling worsens crunch
• Samsung and LG highlight risks
Highlights that the shortages that are impacting the auto makers and spreading further driven by the huge increased demand for electronics and made worse by Chinese groups hit by sanctions or worried about possible sanctions hoarding in advance. That now is hurting the makers of everything else from toasters up; because the cheap simple chips are at the back of the production queue as foundry’s focus on higher value chip production.
It notes 'Samsung Electronics and LG Electronics are among the groups feeling the pinch from manufacturing delays’ 'Samsung began to reduce orders for some smartphone components this month, two of its main parts makers said, after the largest computer chip-maker warned in March of a “serious imbalance in supply and demand” for semiconductors.’ That will in turn hurt the rest of the supply chain. Samsung’s is warning of possible problems in the second quarter because of the shortage which could result in delaying the release of its new high end phone.
So good news for TSMC, Nanya and Samsung's foundry business. TSMC says it sees the shortages lasting into 2022, with their insight into the business I would believe them.

Price growth fears Traders seek protection against threat of sustained rise in inflation
Investors are worried and not as convinced as Powell that inflation will be temporary Andean be contained. 'A measure calculated by the Minneapolis Federal Reserve based on options trades suggests a one-in-three chance that the US consumer inflation rate climbs above 3 per cent over the next five years.’
It follows the fact that net money has been flowing into Tips for the past 29 weeks.Hence the sell off in long bonds and the pressure on the T10 ; albeit that that has eased a little recently.
Nice quote 'Arend Kapteyn, chief economist at investment bank UBS, said investors were in a “shoot first and ask questions later” mentality when it comes to hedging against inflation.’
The key, for me, will be inflation expectations because that impacts wage inflation and I think that is what the Fed is focusing on.

Covid vaccine makers warn US to reject patent waiver
Vaccine makers have warned US officials that temporarily scrapping patents for Covid-19 shots would risk handing novel technology to China and Russia, according to people familiar with the talks.
Key being that giving up the intellectual property rights now could allow China and Russia to exploit platforms such as mRNA, which could be used for other vaccines or even therapeutics for conditions such as cancer and heart problems in the future.A recent speech by Katherine Tai has the companies worried that the US might reverse its earlier decision to oppose the waiver; which the UK, EU and Switzerland also oppose. One to watch as loss of patent would have a significant implication for the phama company valuations.
See also Opinion Waiving IP rules will not deliver more Covid vaccines By Thomas Cueni director-general of the International Federation of Pharmaceutical Manufacturers and Associations

How Gupta sold green revolution to politicians
Crisis-hit industrialist has boasted many high-profile UK figures among his supportersMore insight into the political connections.

Shipping seeks to wean itself off bunker fuel in green push
Executives at odds over how best to decarbonise the workhorses of trade
An interesting look at the problems facing the shipping industry in terms of emissions because “Ocean shipping’s need for autonomy requires us to carry a large amount of fuel. We need a range of alternative fuels at scale and we need them urgently. We’re keeping an open mind and exploring all possible solutions.”
Not mentioned in the article but it is one of the reasons that we are not seeing a huge increase in container ships being ordered despite the Baltic Dry Index hitting highs, is because companies do not know what engines to put into new ships and they don’t want to caught out by building a ship with the wrong type of engine. That means shipping rates are likely to remain elevated foursome time to come and shipbuilders are likely to face lean times.

Exxon feels activist heat over fossil fuels
Supermajor will still invest in oil assets as hedge fund agitates for board revampAn interesting read, whether it sees the board overhaul that activists want again rests on shareholder opinion of clean energy.

Yale endowment model architect warns framework is ‘worn out’
Lewis’s family office turns to new methods after successful strategy becomes crowded
An interesting read looks at the comments of one of the men that originally designed the framework and at the history of Cambridge Associates
Originally it was 'a heavy equities weighting and chunky allocations to private equity, venture capital and hedge funds.’ But now 'private equity and venture capital have become too crowded and the so-called illiquidity premiums have been eaten up by large fees, casting “doubts that this is the way to go for the future”.
He now says the answer is to directly invest in venture deals instead of investing via funds.
He does note that for Yale the model may still work '“First of all, it’s run by David Swensen, who is a genius at this,” says Lewis. Beyond that, Yale has a vast alumni network in investment circles, and fund managers “want to be associated with Yale, which can lead [them] to offer lower fees”.’
He also warns that a lot of investors do not have sufficient inflation hedges in place.
A good read.

Lagardère closes in on governance agreement
Arnaud Lagardère is nearing an agreement to give up the distinctive legal structure that has long granted him tight control over his eponymous French media and retail group in an effort to neutralise the threats posed by two billionaires and an activist hedge fund.

‘We are drowning in insecurity’
FT series Many young people feel the social contract is broken. With some countries starting to emerge from the pandemic, they worry about housing costs, erratic jobs and a pervasive sense of instability.Worth a read
Also Editorial A new deal for the young: fixing the housing crisis
Reform is needed to help those starting out find an affordable place to liveWorth a read

Creating alternatives to China’s Belt and Road
EU-India partnership may become part of a kaleidoscope of schemes
A good read about the need to set up such schemes but not using the old template of “trade and aid”. Notes that the west was slow to respond to President Xi’s BRI move back in 2013 but now with China taking a more authoritarian mantle the west has realised its mistake and is moving to correct it. Importantly the west can offer 'alternatives with less onerous financing terms and more legal transparency’. Including the use of government and non-goverment funding.
Key will be results, it notes that an EU-Japan initiative has little to show so far.
It concludes
'While China, too, can rely on state bank financing, the EU model envisages public bodies providing seed money to leverage private sector financing. Appetite for such investments remains in question; the EU-Japan infrastructure partnership has little to show so far. A similar deal with India will be a test of the EU’s ability to shift from “payer to player” — and leverage its heft in trade, aid and investment to become a rival pole to China'
Worth a read.

The idea the state has been shrinking for 40 years is a myth. By Ruchir Sharma. The writer, Morgan Stanley Investment Management’s chief global strategist, is author of ‘The Ten Rules of Successful Nations’
The conventional wisdom is that US President Joe Biden is ending an “era of small government” and unfettered free market capitalism that dates to Ronald Reagan and Margaret Thatcher in the 1980s. But that era is a myth.I think most people know that. It is interesting to note though 'free market ideology did transform the formerly socialist states of China, India and eastern Europe, where the state now plays a much smaller economic role than 40 years ago.’
I just wonder that with President Xi placing party members on every board whether China’s state involvement is less than 40 years ago?

US labour market needs to adjust. By Rana Foroohar
Makes the point that it is easier to get a job if you are mobile and able to travel or relocate to where the jobs are. It also notes the importance of education. It notes '“For reasons economists still don’t understand,” wrote Hanson in Foreign Affairs recently, workers with less education rarely “choose to move elsewhere, even when local market conditions are poor”.’ I would have thought the reason was obvious, to relocate costs money and involves risk. For those with less education trying to work out the benefit of moving would be difficult but made more daunting by the fact that less educated workers also tend to have less money and so the prospect seems like a ‘pipe dream’. All that said it concludes that it is important to bring jobs to the people who cannot travel.

Moving to net zero may not hurt as much as we think By Martin Sandbu
Concludes 'Finally, the existence of negative net emissions technologies means some activities can be maintained in a net-zero world, even if it proves impossible to make them entirely carbon neutral.
The point is not to underplay the challenge ahead of us, which is gargantuan. The carbon transition requires bold steps in politics and policy, and for people and businesses to change their behaviour from fossil-powered to carbon-neutral options. The cost of doing so must be reduced for the poorest, ideally by redistributing carbon taxes as “carbon dividends”.
But if — hopefully when — we do this, the result need not feel like a revolution. It is failure that could upend catastrophically the normality most people aspire to. Unlike in a war, victory in the climate fight would amount to our day-to-day-living going on much as it did before. That is a message it would help to hear more often.’

LEX {Office furniture/WFH: seats of power}. Looks at Aeron maker Herman Miller’s acquisition of rival Knoll.  Key is that most people will spend a lot less on their office at home than a firm would fitting out an office!  For investors worth remembering

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