March 10 FT OECD +VE, Yields & Bonds, China Spies, Sinopharm, M&A and Climate


10 Mar

MARKETs at 1:30pm
AUSTRALIA
ASX 200 unable to sustain early gains and fell 0.31% where the energy sector tumbled 2.11% as oil prices remained under pressure. The heavily-weighted financials subindex as well as the materials index were also down 0.76% and 1.92%, respectively.
JAPAN 
No data markets reacting to the US moves overnight and general inflation/growth concerns
Nikkei opened higher after the US rally but sold down to Tuesday’s closing level and traded sideways into lunch. PM started slightly higher, sold down but then rallied to the opening level but now easing back Currently +37pts (+0.1%) @ 29,065
Topix followed a similar pattern +1pts (unch) @ 1,919
S KOREA  
No data but bank delinquency rates inched higher in January and covid cases rose to 470 the highest in 19 days.
Kosdaq opened higher and rallied initially to 911 but failed to hold and has trended lower though the morning to just below yesterdays closed. Currently trading sideways around flat -3pts (-0.4%) @ 893
Kospi traded in a similar pattern, testing 3,014 in early trades currently -17pts (-0.6%) @ 2,958.
TAIWAN 
Opened higher a traded data showed continued growth and the ministry expects it to continue in March. Also a number of good local results. Market tested 15,986 in early trading but with regional market easing back failed to get to 16,000 and trended lower with support around 15,860 worked higher but then around midday reversed and drifted woe to close +18pts (+01%) @ 15,871
CHINA 
Inflation and PPI data slightly better than forecast
CSI 300 opened higher at 5,047 and traded sideways through the morning. PM opened towards to lower side of the morning range and trading sideways.Investors concerns on Government policy, seems little chance of stimulus and focus on dealing with debt. Today price action suggests team China is still active supporting the market .
Data
Inflation Rate Feb -0.2% YoY vs -0.3% Jan (F/cast was -0.3%)
Inflation Rate Feb +0.6% MoM vs +1% Jan (F/cast is +0.5%)
PPI Feb +1.7% YoY vs +0.3% Jan (F/cast was +1.7%)
HONG KONG 
Opened @ 29,255 +482pts vs +157pts ADR’s
On a strong rebound of Ecommerce names and China Telecom after results but market sold down in early trades, initial support at 29,000 but then further selling to yesterday’s close before a bounce back to 29,000 but unable to hold and sold down into lunch. PM opened at Tuesday’s closing level and trading sideways.
Ecommerce names still leading, Chinese Financials seeing weakness along with HK property developers after comment from Vice Premier Han Zheng about resolving HK’s housing problems; which some take to mean that Beijing will start addressing developers’ hegemony obviously believe it to be part of the problem behind the anti government protests. T/O 30% lighter than yesterday market currently unchanged at 28,773
Results at Lunch
Cathay Pac FY20 Annual Results. Loss was $21.648 billion, against $1.691 billion in FY19 profit; loss attributable to ordinary shareholders was $21.876 billion; profit attributable to preference shareholders was $228 million. LPS equaled 424.3 cents. No dividend was declared.
IPO
CHEERWIN GP (06601.HK) closed the midday at $7.92, down 14% against the listing price of $9.2, on half-day volume of 162 million shares, involving $1.286 billion.
EUROPE 
Expect markets to open higher following the rebound in the US overnight and largely ignoring the weakness in Asia.
Data due FRANCE  Industrial Production
US Futures 
Opened slightly higher in Asian time but have eased back and currently Dow flat, S&P and NDX -0. 2% (from +0.1% earlier)
Data Core Inflation Rate, Inflation Rate, EIA Oil Change Report, Monthly Budget Statement
Earnings Campbell Soup, Oracle, Vera Bradley, Tupperware, United Natural Foods, Adidas, Cloudera, Bumble, Fossil, Lending Club, Express, AMC Entertainment

FT Front page 
Biden stimulus will boost global recovery from Covid, says OECD
• Growth forecasts revised up • Bank and airline stocks rally • Europe rebound lags
Mainly because of the roll out of inoculation programmes and increased stimulus spendings with Biden’s packages seen as adding about 1% to the global economic growth forecast for 2021 alone.
New revised expectation is for Global growth +5.6% pa vs +4.2% last November. But European growth delayed because of the delays in vaccinations. Expecting some temporary price pressures but unlikely to drive wages higher or result in persistent inflation.Emerging Economies fare less well but still an improvement.
UK hits back at EU’s ‘outright lie’ over claims it imposed a vaccine export ban. 
Comments from the European Council President Charles Michel that the UK and US have banned shipments of jabs and their components. Which coming days after Italy and the EU actually did ban the shipment of 250,000 does of the AstraZeneca vaccines to Australia seems a little ironic to say the least but reflects the pressure the EU is under having proposed a group sourcing scheme and then failed to deliver good results in a timely fashion.

INSIDE
GLOBAL INSIGHT
‘Unwelcome’ rise in yields set to cause frustration at ECB (Page 2)
Worries that the ECB will over react to the rising bond yields and undermine the budding recovery. Essentially bond yields are at historically low levels but the recent moves have been notable due to contagion from the US.
It looks at a recent speech by ECB broad member Fabio Panetta who said “we are already seeing undesirable contagion from rising US yields . . . that is inconsistent with our domestic outlook and inimical to our recovery”. Panetta is worried about the market tightening and in the short term wants more accommodation.
Longer term he wants the ECB to keep the accommodation until there are clear signs of recovery not just expectations. Much of what he is saying echo’s what Yellen and Powell have been saying. Whether his views gain traction remains to be seen but it does reveal the big divide with the ECB.
The piece concludes 'Urgency does not mean the arguments will get traction. Zangarelli cautioned that there was “a big divide within the ECB between dovish and hawkish members”.
In the short run, she thinks “they have to react” to the “unwarranted” rise in bond yields.That could bring the central bank close to targeting of specific levels of bond yields, or “yield curve control”. Panetta’s speech calls for “anchoring” yields. For investors, action matters more than words: yield curve control by any other name would smell as sweet’

I think the key thing it reveals is that none of the key institutions have any certainty about how the post pandemic recovery will roll out. We have never been in such a situation before and most peoples experience of inflation is technical rather than from experience. Moreover, as in there previous times sometimes inflation isn’t the big problem but we get a crisis that is associated; like the subprime crisis in the US. Is is possible that the US restrictions on foreclosures and evictions could trigger a default problem in the mortgage lending market and CBS; we just don’t know yet. The change in office usage could present a problem for commercial lenders. The bigger issue will be that it will not be the banks that are exposed this time but other institutional lenders that have been draw into the space in the search for yield.

See also Markets Insight Bond sell-off is a taste of things to come by Thushka Maharaj a global multi-asset strategist at JPMorgan Asset Management.
She notes that markets are undergoing a pivotal shift; the switch from Central bank support over the last 9 months to economic fundamental going forward. Whilst the moves may look like disorderly re-pricing it actually reflects growth expectations; which is good.
Says that it is hard to call the current conditions tight; taking into account inflation and the real 10 year yield being deeply negative. She says 'Assets more sensitive to swings in risk appetite seem, by and large, to be taking the bond volatility in their stride. Value stocks with low valuations have fared well while small-cap stocks are at or near their highs. Even the Vix, the ultimate fear barometer that measures investor expectations of equity market volatility, remains remarkably subdued.’
She expect more verbal interventions by the central banks to try and smooth concerns if/when tightening happens.
The recent moves however reflect the challenges for core fixed income investors as the global economy moves into a new cycle, with new risks building.'The prospect of sustained fiscal stimulus, rising inflation risks and diminished central bank support, collectively challenges the safe harbour that government bonds once provided.’
Notes that 60% of 1,500 clients surveyed were reducing allocations to develop market government bonds or employing more active tools to deal with volatility.
Key being Developed Government bonds yields are low with little room to move lower and proved protection.
Policy is changing; Fiscal policy is increasingly being used to stimulate growth, monetary policy is raising inflationary expectations which implicitly imposes a floor for bond yields.'In short, stronger economic growth sparked by unprecedented stimulus or the return of inflation will eventually lead to a pullback in liquidity support from central banks. Investors today, perhaps, are preoccupied with the risk that the economic recovery is too sharp, rather than not sharp enough.That is a fear that is not well hedged by a large allocation to sovereign bonds.’
She thinks its unlikely that Central banks are going to reverse their actions but even a small recalibration will cause volatility in the bind market; as seem by the recent moves in yields.
So investors need to make sure they are geared to a cyclical recovery and increase allocations to inflation linked assets and growth. For those able to bear illiquidity that means infrastructure and property.
But notes 'Market volatility last March posed the first real test of these assets during times of stress. The resilience of those exposed to green-energy investment and technology-related logistics was notable.’
She concludes 'Looking ahead, forecasts in our annual study on long-term returns across markets suggest US core real estate will offer an average return of 5.9 per cent for more than a 10- to 15-year period with more than 80 per cent of that sourced from high-quality, stable income streams. We expect that, with leverage in real estate assets a mere fraction of the levels seen in the financial crisis, investors will increasingly be drawn to their income potential.
As markets shift focus from policy support to economic fundamentals, government bonds cannot provide the safety they once did. Given the risks, investors have no choice but to diversify sources of safety in portfolios.’

I think property is a great asset (I am a chartered surveyor and so a little biased) and it is a great smoother of performance. It would be interesting to know which sectors of the property market they would focus on in the US bearing in the mind the current uncertainties in the office market and retail malls. Offices historically provided high quality stable income streams from banks, lawyers etc etc but with changes and remote working the number of such properties is going to drop and those still available become more expensive. Key will be due diligence. New sectors like Data Centres and logistics centres are likely to be the best performers in the short term whilst we see how the wider markets shape up.


Companies & Markets 
Hard drive Continental shares fall as German auto group warns on hit from chip shortage   Continental warned that the global chip shortage would hit its profit margins and forecast they would be between 5% and 6% vs the 6.9% analysts were expecting.
Also noted the increase in freight costs. It is cutting 30,000 jobs but ruled out further cuts as the move to electric cars is likely to disrupt the current supply chains and it estimates that electric car margins will be in the region of 11%.
Good news for the chip makers and the shippers and logistic operators short term but shipping rates are already starting to fall as the supply chain normalise.

Chinese spy mission exploiting Microsoft software vulnerabilities sets off hacking melee.
'What began as a China espionage campaign targeting “specific individuals” via flaws in Microsoft software has escalated into a hacking free-for-all that is claiming tens of thousands of business and public sector victims.’
The incident has resulted in The US Cybersecurity and Infrastructure Security Agency issuing an alert on Twitter about the vulnerabilities of Microsofts Exchange email app. Microsoft has blamed a 'China state-backed hacking group known as Hafnium’. But since the initial attacks and news getting out a whole host of other groups have joined in; hoping to benefit before users were able to ‘patch’ their systems. 'The European Banking Authority this week became the first notable body to say publicly that it had been compromised. It is unlikely to be the last.’
Another incident follow the SolarWinds one is bad news for Microsoft but it reveals how complexed it is trying to update software/add new features and the dangers involved, especially as there are state backed groups out there seeking to find flaws in the systems. The fact that a Chinese groups been blamed is another grievance to add to the already strained relationship between the two nations.

Sinopharm faces struggle to turn Covid vaccine into a global success
State-backed Chinese group sees pandemic battle as a chance to establish itself on the world stage.
Key will be whether the group can succeed depends on 'politics, trust and supply’.
In its favour is the fact that vaccine using mRNA technology (BioNTech/Pfizer and Moderna) are in short supply. So those who haven’t already secured them will need to turn to the likes of Sinopharm for doses; which uses more traditional techniques where 'a virus is chemically inactivated and then injected into a patient to prime their immune system. The second uses a slightly different strain of the virus.'
So far UAE, Bahrain, Pakistan, Egypt, Serbia and Hungary have approved Sinopharm’s first vaccine, which the company said had an efficacy rate of 79 per cent in phase 3 trials.
Chinese media has reported 'countries had placed orders for at least 140m doses of the two by the middle of January; far shy of the likes of Oxford/ AstraZeneca. But if Sinopharm grows its order book substantially, it would vindicate Beijing’s ambition to develop state-backed companies with globally competitive technology.’
But Sinopharm is a sprawling business empire and this is just a part of it, albeit more important now. Key is scaling up production and its spending RMB2bn to do that, even though it hasn’t seen the order flow to justify it yet.
A key the article says is 'But scientists say that for the vaccine to become a contender on the international stage, Sinopharm needs to make a fundamental change: stop relying on Beijing to give its jabs credibility and be transparent about the trials and the data they generated.’
That is the long term key, especially as China has no historical track record to exporting vaccines. The other issue is fulfilling current orders; it is currently lagging the targets set by Beijing.
So there is opportunity but it will not be easy. It will need to become adapt at dealing with international buyers and meeting their demands for information and delivery times. It needs to get away from the ’State’ orientated system under which it currently works.
An interesting read and it will be interesting to watch to see if it can complete against international competitors. I think one key element will be the sharing of the data, something that a lot of Chinese companies are reluctant to do and yet it is the international norm. To a degree it is not just a test of Sinopharm but of the Chinese system.

Study clears way for 62-turbine wind farm off US
An interesting read and the initial approval makes the scheme more likely. As with most things once one scheme is off the ground others follow. A positive for green energy and also for GE who will supply the turbines. Also another case for aluminium and copper and the wind farm will need cable to link it to the grid in Massachusetts. Also a positive for the gearbox makers etc.

HK-listed businesses trail rivals on women directors
Bias towards males expected to widen as more mainland companies join Hang Seng.
Key seems to be that there are plenty of qualified women but men are resistant to change. Talks about an impetus for change and the fact that some institutional investors are now using their votes to push for change but the reality comes down to the reluctance of the established men in a position to effect change to act. They are too comfy with maintaining the status quo and changing that will be a problem.

In my teams I have always had a good mix, at Haitong Int in a team of three sales traders two were women. I have also had women bosses that have demonstrate great leadership and taught me much that I still rely on today. In today’s world women have the same education as men, the same business experiences/ mentoring as men, the only thing that needs to change is the willingness for the men in charge to pick the best person for the job regardless of sex.

China M&A surges amid domestic demand focus
Chinese companies are seeing three times as much M&A activity this year vs 2020, although with the outbreak of covid last year that may not be a good comparison. It notes that Beijing is focusing on domestic demand and reducing reliance on overseas technology and markets. Deals that were previously on hold due to covid are now progressing; with a focus on technology and logistics during the pandemic. Recent deals 'included Xinjiang Tianshan, a cement company, buying four regional peers for Rmb98bn ($15bn); the $2.3bn takeover of Kerry Logistics by Chinese courier group SF Holding; and the purchase of Chinese logistics company CJ Rokin by Hong Kong-based private equity firm FountainVest Partners.’

What the article doesn't touch on is whether the deals being done now are at a discount to the values being discussed prior to the pandemic and whether these are driven by their being distressed situations or other reasons involved. Clearly over the last few months there have been instances of debt issues and Beijing is keen to see ‘market solutions’ rather than it or the local governments step in. In many cases the local governments cannot because they are short of cash too. The news yesterday that local government’s hidden debt was to become a national security issue is a worry because we don’t know how much is out there. I suspect that if it becomes a national security issue that means it cannot be revealed or investigated and that could hurt investors.
For sometime China has been trying to see consolidation in a number of industries it is a theme that is will need to pursue in order to be able to see the economies of scale without which some businesses remain loss making.

Editorial  China is falling short on its climate pledge
The world’s biggest carbon emitter needs to take more rapid action
Looks the lack of detail about how it intends to become carbon neutral by 2060. Concerns about the seeming lack of commitment to move away from coal, it has recently increased building coal fired power stations (although China says the new one are cleaner than the old ones so net net it is positive).
Key also is that is China’s commitment is questioned then other countries efforts may also be reduced. Currently hopes are pinned on the its first five year climate change plan due to be announced later this year. It may be that with Biden seeking to take the moral high ground on climate China may react positively.
But it concludes 'Momentum is building in both the US and EU towards some form of carbon border taxes targeted at imports from countries that are lagging behind on climate action. Failure by China to make tougher commitments raises the risk that Washington and EU capitals will conclude firmer action on trade is the only way to ensure progress.’

I think China, or rather President Xi made the assertion to undermine Trump. They are now struggling to work out how. Part of that hope is that technology with come to their aid over time. Countering that is the fact that a lot of provinces rely on coal and don’t have the money to invest in wind and solar despite the fact that to do so would save money and hero achieve the goals.

For Interest
Banks adopt new debt terms to avoid repeat of Citi’s $900m payment blunder. 
They are now adding legal terms to protect themselves in the event they make a similar error. Hoping to close the legal loophole that hurt Citi’s last earnings.

FT BIG READ. INVESTMENT The growing army of amateur investors
Once dismissed as a quirky sideshow, the growth of retail trading on sleek, often fee-free smartphone apps such as Robinhood is transforming markets and forcing mainstream participants to take note.
The US is experiencing what we have seen in Asia for many years. What is different is that they are younger, inexperienced but more aggressive. They have new tools in chat rooms rather than relying on the press, in many cases they also have less cash but more leverage, more access to derivatives and don’t have to pay commission.

I still wonder how much of this new business will remain after the US get back to a more normal work environment. Much of this trading requires constant attention to the screen and so can’t married with working in an office. These are guys building long term portfolios but day traders with short term goals.Another big factor will be if we see a significant market pull back; that sort of event tends to wipe out a lot of new traders who then never come back.

There are good reasons for business leaders to invest in bitcoin by Dambisa Moyo a global economist and the author most recently of ‘Edge of Chaos’
An interesting read the acknowledges the problems with bitcoin as well as outline the benefits.
He concludes 'However, there is a third reason seriously to consider adding bitcoin to their balance sheets — that of risk mitigation. Even if a company’s leaders do not believe in the currency’s long-term efficacy, they should ensure that they do not find themselves “offside” against a rival. Were bitcoin to continue to appreciate in value, a substantial increase in a competitor’s balance sheet could, in effect, place your company in strategic danger of being eclipsed in the marketplace or even being acquired.
In this case, securing bitcoin today would be prudent risk management and have little to do with whether the board and management believe in the longer-term efficacy of cryptocurrencies. Corporate leaders must instead be alert to the tipping point when the absolute risk of not owning bitcoin outweighs the risk of owning it.’
An interesting thought but the reverse would also be true as Tesla and Ark recently saw. Bitcoin can go up and down.

LEX Cathie Wood/Ark: flood warning. 
'For investors, the question is not just whether the rotation out of growth stocks and into value shares will last this time around. After all, there have been many false dawns. A more immediate concern is how Ark handles its growth. Over a one-year period, assets under management have swelled from $3.6bn to nearly $53bn last week. Its strategy of pouring fresh capital into its existing holdings is not sustainable.Nothing is wrong with Wood’s thematic approach to investing in innovative and disruptive companies. The danger is when a fund becomes too concentrated in a few holdings that are losing money and have high valuation multiples. The bigger you get, the greater the rationale to diversify.'

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